Jolle van der Mast

“ S UPPLIER ON A W ^IRE”

Jolle van der Mast

“ S UPPLIER ON A W ^IRE”

Creating a methodology for an objective risk assessment of the supplier evaluation and selection process of first tier suppliers in the

automotive industry.

Jolle van der Mast Student number 1238965

University Supervisors:

Prof. Dr. D.J.F. Kamann Dr. J. de Vries MöllerTech Supervisors:

M. Wetzel C. Hanna Bielefeld, May 2006 Rijksuniversiteit Groningen

Technical Business Studies

The author is responsible for the contents of this thesis; the copyright of this thesis lies with the author.

“Associate yourself with men of good quality if you esteem your own reputation”

George Washington

Ever since I can remember, cars and the automobile industry have interested me. When the time came to finalise my studies in Technical Business Administration at the faculty of Management and Organisation of the University of Groningen, the first choice to do my research study was therefore in an organisation within the automobile industry. In the last year of my studies I took the optional subject ‘Purchasing Management’ which triggered my interest in the purchasing field. Being able to do my research study in the purchasing department at MöllerTech, a first tier supplier to the automobile industry, was a dream come true. I would like to thank my godfather, Willem van Eeghen, for making this possible.

During the past six months in Bielefeld I have not only learned a great deal about purchasing and supply management but also about Germany, the Germans, their culture and their language. I enjoyed my time in Germany and think of it as a perfect way to round off my studies.

I would like to thank Mr. Wetzel for supervising me all these months and for giving me the opportunity to do my research study at MöllerTech. I would also like to thank everybody at MöllerTech, especially everyone in the purchasing department, for helping me these past six months and for putting up with my bad German and my stories about Holland.

Next I would like to thank Prof. Dr. D.J.F. Kamann and Dr. J. de Vries for supervising me during my research. Their criticism helped me keep a clear view of the situation and look at all aspects of the research subject in a different manner. Last, but certainly not least, I would like to thank my parents for their constant support during my time in Groningen and Bielefeld.

Jolle van der Mast

Bielefeld, April 2006

Supplier selection and evaluation is one of the most crucial parts of the purchasing process. One reason for this is the degree to which the production of parts is today outsourced by manufacturers. By outsourcing production of parts, a large portion of the quality management is at the same time being handed over to the supplier. Therefore the capabilities of the supplier are of great importance for organisations like MöllerTech - Germany (from here on MTD), a first tier plastics components supplier to the automotive industry. Once MTD uses the outsourced parts, these become their responsibility. Being a first tier supplier, MTD must comply with the particular requirements that are laid out by its customers concerning supplier management. Yet using a different system for each customer is time consuming and inefficient. This research aimed to create: ‘an objective and integrated supplier selection and evaluation system for MTD, which mainly concentrates on new suppliers and is at the same time compliant with all customer requirements.’ The absence of such a system could lead to serious problems in the various phases of a project: development, prototypes, pre- production series and production series.

The research question was therefore formulated as follows: Is it possible for MTD to select and evaluate suppliers, simultaneously minimising risk, assuring stability and achieving higher performance quality from their suppliers whilst meeting all customer demands?

The scope of the research was restricted to the evaluation and selection process of the suppliers of so- called ‘buying parts’ (i.e. the purchasing of already finished parts that are subsequently used in modules produced by MTD). The problem was tackled using ‘Business Process Redesign’, a methodology that follows a predetermined set of steps concerning the process, namely: envision, diagnose, redesign, reconstruct and evaluate. This methodology was translated into the following steps for this research.

First, the external requirements (i.e. from BMW, DC and VW but also from MTD departments) were

identified to gain an understanding of the process requirements. Secondly, the current purchasing

process was assessed to see how MöllerTech currently deals with the problem. Thirdly, existing

theories were discussed and debated in relation to the situation at MöllerTech. This information was

then used as the basis for reinforcing the empirical findings to redesign the process. In the last part of

the thesis a system was created that identifies (product and supplier) risk and in combination with the

existing tools fulfils all process requirements. Finally a tool was built in Excel that guides a purchaser

through the process and highlights the risk for him.

relating to a particular project, then potential risks will be identified as soon as the product to be purchased is known and before suppliers are selected.

As shown in the new evaluation and selection process depicted in figure 6.1 (page 80), it was found that differentiation between product segmentation and supplier segmentation is crucial for the mere reason that product segmentation can be applied far earlier in the process. By identifying risk before selecting the supplier, the chances of selecting a more suitable supplier increase because the specific capabilities required from the supplier have been identified. Why look at supplier risk when a great deal of the risk actually experienced in the past was caused by the product’s complexities or characteristics? By answering eleven specific questions (see table below, rank 11 is the most important) the products are placed in certain segments and potential risk can be identified.

Rank Product Segmentation Criteria 11 Development risk

10 Development responsibility at supplier 9 Buyers Market Complexity

8 Criticality of product 7 Logistics (packaging) 6 Product type

5 Buying situation 4 Market Complexity

3 Quantity of parts purchased per year 2 Nominated supplier

1 Important purchase (spend)

The new system also triggers the purchaser’s cognitive thought process concerning the product, its attributes and the environment that influences its characteristics. It helps him identify potential risks because he is forced to answer questions about the product. The system contributes to a better evaluation and selection of new suppliers because it provides more information on risk before specific suppliers have been considered. The purchaser will have clearer parameters for the required supplier and can make a pre-selection, rejecting a number of suppliers he now knows cannot handle the job.

Indirectly, the purchaser has then formulated a purchasing strategy because he will have been able to identify the product risk and any potential supply sources he will not want to use.

After product segmentation, supplier segmentation was added to the existing supplier and evaluation process. By asking another three questions the number of suppliers can again be reduced.

Is the supplier qualified?

Is there an existing relationship with the supplier?

Distance to MTD or MTW? This depends on the location of the module assembly

was found that the criteria used by MTD could be enhanced by using criteria from Choi and Hartley’s study on the changes in the automotive supply chain management from the perspective of the suppliers. A panel of MTD employees weighted these combined criteria. Then, two systems were created to evaluate suppliers by using the enhanced set of criteria, one for new suppliers and one for existing suppliers.

The figure below depicts the new supplier evaluation and selection process at MTD (as seen in figure 6.1). The green steps are the steps that were added or were significantly changed as a result of this research study. The boxes on the right show where the new models, methods or criteria are situated in this thesis.

By applying the new steps to MTD’s supply management process, a clearer view of the potential risks

concerning suppliers is gained and eventually a higher quality can be expected from the suppliers. This

will help MTD to better deal with the requirements of its own customers, who have their supplier on a

wire.

PREFACE iv

EXECUTIVE SUMMARY v

LIST OF ABBREVIATIONS vii

LIST OF FIGURES viii

LIST OF TABLES ix

INTRODUCTION 1

1. THE ORGANISATION 2

1.1 Company History 2

1.2 MöllerGroup 3

1.3 MöllerTech 5

1.4 Context of the Research 9

2. RESEARCH DESIGN 14

2.1 Reason for Research 14

2.2 Problem Statement 15

2.3 Conceptual Design 16

2.4 Research Question 21

2.5 Research Methodology 22

2.6 The Research Framework 25

2.7 Data Gathering 28

3. EXTERNAL PROCESS REQUIREMENTS 30

3.1 Benchmark Requirements 30

3.2 Interviews for Requirements (Internal Customers) 37

4. CURRENT BUSINESS ASSESSMENT 40

4.1 Purchasing Department 40

4.2 Products & Suppliers 42

4.3 Purchasing Process 44

5. LITERATURE REVIEW AND APPLICABILITY ANALYSIS 51

5.1 The Process 51

5.2 Segmenting Products & Suppliers 57

5.3 Types of Supply Risk 69

5.4 Supplier Selection Criteria 73

6. PROCESS REDESIGN 78

6.1 New Process Definition 78

6.2 Process Change 79

6.3 Product and Supplier Segmentation 80

6.4 Development of Supplier Evaluation and Selection Method for MTD 84

6.5 The Improved Process 87

7. CONCLUSIONS & RECOMMENDATIONS 88

7.1 Conclusions 88

7.2 Recommendations 90

REFERENCES 93

LIST OF ABBREVIATIONS

i.e. Id Est (Latin); in this case

e.g. Exempli Gratia (Latin); for the sake of example n.d. No date for the reference

MTD MöllerTech Deutschland MTW MöllerTech Wales EBT Earnings Before Tax H&S Health & Safety

R&D Research & Development NPD New Product Development OGC Office of Government Commerce GM General Motors Corporation DC DaimlerChrysler AG

VW Volkswagen AG

PSA Peugeot Citroën (originally from ‘Peugeot Société Anonyme’) QMS Quality Management System

RFQ Request for Quotation EDI Electronic Data Interchange SOP Start of Production

OEM Original Equipment Manufacturer (e.g. BMW)

DDP Delivery Duty Paid

LIST OF FIGURES

Figure 1.1 Möller’s Core Materials 3

Figure 1.2 MöllerGroup 4

Figure 1.3 Customers 4

Figure 1.4 The MöllerTech Organisation 5

Figure 1.5 MöllerTech Locations 7

Figure 1.6 MöllerTech Parts 8 Figure 1.7 Purchasing Department 12 Figure 2.1 The Broad Model 17 Figure 2.2 The Conceptual Model 20

Figure 2.3 Research Model 27

Figure 3.1 Example of supply chain representation 33

Figure 3.2 Supplier in the SRA 33

Figure 4.1 The Purchasing Department 41

Figure 4.2 The Purchasing Department within the Organisation 41

Figure 4.3 The Buying Parts 42

Figure 4.4 Kamann’s Nine Step Purchasing Function 44

Figure 4.5 The Initial Purchasing Process at MTD 50

Figure 5.1 General Steps in the Purchasing Process 52

Figure 5.2 Supplier Evaluation and Selection Process 53

Figure 5.3 Portfolio Method 58

Figure 5.4 Purchasing Cube 60

Figure 5.5 The Cube with the JVA Moat 61

Figure 5.6 Relative Power Positions 62

Figure 5.7 The Supplier Involvement Portfolio 63

Figure 5.8 Part of the “Selecting a Supplier Performance Measurement Method” 66

Figure 5.9 Company X’s Supplier Segmentation Model 67

Figure 6.1 The New Supplier Evaluation and Selection Process 80

LIST OF TABLES

Table 1.1 Balance Score Card 6 Table 2.1 Methodologies, Stages & Activities 25 Table 2.2 Detailed Overview of Research Model 28 Table 4.1 ‘Spend’ on the Buying Parts 43 Table 4.2 Supplier Decision Matrix 47 Table 4.2 Assessment Criteria and Weights 49 Table 5.2 Segmentation Methods 69 Table 5.3 Classification of Supply Risk Definitions 71 Table 5.4 Means and standard deviations for selection criteria 74 Table 5.5 Differences in Criteria, MTD & Choi et al. 77

Table 6.1 Segmentation 81

Table 6.2 Product Segmentation Ranking 83

Table 6.3 Outcome of Criteria Questionnaire 85

INTRODUCTION

MöllerTech is a complex plastic components supplier to many automobile manufacturers (i.e. OEM, automakers). Since automakers started outsourcing more of their parts, MöllerTech has started supplying complete modules. Therefore the purchasing department not only has to purchase raw materials and machines but also finished products which are assembled onto or into MöllerTech’s complete plastic modules. To minimise supply risk, automakers place pressure on MöllerTech to manage their suppliers (second tier) in the same fashion as the automakers. MöllerTech’s supplies many different automakers meaning different supply management requirements for different projects.

This is not efficient.

The aim of this research study is to develop an objective and integrated supplier selection and evaluation system, which mainly concentrates on new suppliers, that satisfies all the automakers’

particular requirements and at the same time lowers the supply risk. After an introduction to MöllerTech, the design of the research will be discussed. This will include the research questions and methodologies that were used. In Chapter 3 the external process requirements is reviewed. Chapter 4 assesses the current supplier selection and evaluation at MöllerTech. In order to develop a standardised system that complies with all the customer’s requirements, existing theories are reviewed in Chapter 5.

Using the external process requirements, the current situation and the existing theories Chapter 6

shows a possible redesign of the supplier selection and evaluation system. In the last chapter

conclusions are made and recommendations are given concerning the findings of this research study.

1. THE ORGANISATION

This chapter aims to provide the reader with an understanding of the MöllerGroup organisation, its products and markets. First, the history of this 275 year old family owned and managed company is described. Large multinational organisations like the MöllerGroup often have complex organisational structures. These structures could have an impact on this research study therefore it will be described in this chapter. Then an overview of MöllerTech will be given after which its primary processes will be introduced and explained. This information was mainly available on the MöllerGroup intranet.

Finally the context of the research will be defined to create a picture of the environment surrounding the problem.

1.1 Company History

The MöllerGroup is a privately owned company, now in its 8th generation of family management. In 1730, the son of a clergyman, Johan Théodor Möller, began producing and trading copper goods in Warstein, a small village about 120 kilometres south of Bielefeld. In 1762 Johan Théodor Möller acquired his eighth location, a copper-works in Bielefeld, the location of the present headquarters. This marks a further phase of expansion whilst gaining experience in the trade in this raw material. The second generation involved itself in international trade, which meant that the copper-works did not remain the Möller family’s only business for much longer.

In 1827 Möller founded the tannery and leather goods factory “TA Möller”, which still produces in the same place today. The heir branched out in new directions: capital participation and corporate activities and takes on socio-political obligations. Under the direction of Friedrich Möller, in 1860, the company develops into a diversified commercial enterprise. In 1863 Dr Karl Möller and his brother jointly founded the engineering works “K. & Th. Möller”. The company’s products covered a range of equipment and machinery for all branches of industry. By taking on leather belting in 1880, the activities of “Leder Möller” were extended. Through modernisation and mechanisation, thanks in part to machinery from its own engineering works, “Leder Möller” was then able to increase its production capacity considerably and to fulfil large volume orders, thereby consolidating its already well established position in markets at home and abroad.

With the fifth generation, a new belting factory is established and the “technical leather” product range is expanded. Large size belting manufacture begins and Möller products are even exported to China.

1936 is a new historic date for the company with the leap into plastics technology. The Möller’s

gamble on a new macromolecular material (Duroplast), which experiences a boom in the following

decades. This led to the set-up of Möllers’ first plastic moulding plant. In 1949 the injection moulding facility was inaugurated.

In the nineteen fifties, leather production dominates the sector of footwear consumer items and V- belting. The plastics production develops significantly and the first plastic pieces for car interiors are produced for Mercedes Benz in 1952. In the sixties, the leather tannery is again modernised. From then on the business concentrates more on serving the demand and supply components for its customers’ products. In the eighties Möller factories mainly act as an industrial supplier and the international expansion begins under the new leadership of Dr Peter von Möller. He acquires plants in France (Châteauroux, Gamaches, St. Clément and Verrières-le-Buisson) and in Spain (Amurrio et Bilbao). Several factories were built in Europe, across the Atlantic and following the Reunification of Germany, two plants are set up in the eastern Germany.

Figure 1.1 Möller’s core materials

Today, the Möller Group has twenty two production sites and is involved, thanks to the support of joints ventures, in all automotive constructors’ major markets except the Chinese market. The Möller Group is trying to meet the growing demand for natural materials by combining plastic with environmentally friendly natural fibres. Through continuous process and product innovation, keeping up with technological development and demand from its customers Möller has become what it is today and which will be illustrated in the following section.

1.2 MöllerGroup

MöllerGroup is today globally orientated and innovative in technological know-how. The MöllerGroup’s core expertise lies in the areas of plastics technology, the manufacture of flexible products and leather processing and is therefore organised into three operating areas – plastics technology, flexible mouldings and leather processing and components worldwide. Plastics are principally supplied to the automotive industry, flexible mouldings for industry in general and leather processing for the automotive, furniture and fashion sectors.

The three corporate units are divided according to the following areas of business: MöllerTech, which

is the subject of this study, operates in plastics technology for the automotive industry, MöllerBalg and

MöllerFlex specialise in flexible mouldings for general industrial applications, and NordLeder (MöllerLeder) is dedicated to leather processing. Figure 1.2 visualises the main corporate units of the MöllerGroup. Turn to appendix 1.1 for the detailed organisation chart of the group.

Figure 1.2 MöllerGroup

The companies in figure 1.3 are a few of the group’s better-known customers.

Figure 1.3 Customers

Strategy

“The future of the MöllerGroup business is based on continuous innovation, technically advanced know-how and a high level of flexibility, while never losing sight of the need to provide a comprehensive service to our customers.” ¹

1 www.MöllerGroup.com

1.3 MöllerTech

MöllerTech is a plastics processing specialist. Custom solutions are what MöllerTech excel at and these are not unusual in the automobile industry, as car models change every few years. MöllerTech is responsible for the development and implementation of projects through production of systems, modules and individual components for vehicle interiors. It is involved throughout the process from the first design drawing to the finished product. From its internationally located production facilities MöllerTech supplies well-known organisations all over the world, including BMW, DaimlerChrysler, Peugeot, Renault, Honda, Toyota and Volkswagen. In figure 1.4 the organisational chart of MöllerTech is shown. In the following sections the MöllerGroup goals will be described, after which the two main management tools, project management and quality management, used to reach the goals are explained. Following this, the MöllerTech technologies by will be highlighted.

Figure 1.4 The MöllerTech organisation

Goals

MöllerTech is an organisation that constantly tries to innovate to remain one step ahead of its competition. This is not limited to product innovation, but the group also stays ahead by adopting new ways of managing people and processes. An example is the use of the Balanced Scorecard method.

MöllerTech key goals are based on the Balanced Scorecard and its use for 2005 can be seen in table

1.1.

Table 1.1 Balanced Score Card 2005 ²

The Balanced Scorecard (‘BSC’) is a measurement and a management system that helps a company formulate its vision and strategy and translate those into actions. Kaplan and Norton (1996) described the balanced scorecard as follows, “The balanced scorecard retains traditional financial measures. But financial measures tell the story of past events, an adequate story for industrial age companies for which investments in long-term capabilities and customer relationships were not critical for success.

These financial measures are inadequate, however, for guiding and evaluating the journey that information age companies must make to create future value through investment in customers, suppliers, employees, processes, technology, and innovation.” ³ In the BSC above, MöllerTech sees the Purchasing process as a process that, if adjusted, could improve its financial position. To do this it uses the Gateway process. This process is shown in table 1.1. The reason for showing the BSC is to indicate that MöllerTech is interested in the outcome of this research study.

Project Management

MöllerTech’s international project management is based on a Gateway system (see below) that strives to create relationships. MöllerTech supports its customers from the preliminary development and design phase all the way through to the final product ready to fit. MöllerTech also handles all logistics, from packaging and design to barcode-controlled warehousing.

The Gateway Process examines a programme or project at critical stages in its lifecycle to provide assurance that it can progress successfully to the next stage; the process is based on well-proven

2 MTD Intranet

3 Kaplan and Norton, 1996

Finance Customer/market Company processes Employees

1. Turnover 1. Targeted Business degree of completion

1. COPQ 1. PV per Employee

Key figures

2. EBT 2. Turnover per car 2. Project Costs 2. Quote of presence

1. ≥7% order books 1. ≥ 75% 1. 25% cost reduction 1. ≥ €18k per month Target 2005

2. 1,7% points increase and positive

2. 25% increase to core vehicles

2. 25% cost reduction 2. ≥ 94%

1. Customer Management 1. Acquisition strategy 1. Process Stability 1. Operational processes 2. Business achievement 2. Cost Structure 2. Project Management 2. Motivation, climate, H&S Vehicles

3. Return, Finance 3. Process Stability

1. Acquisition process 1. Acquisition process 1. Process cycle/ employee qualification

1. Operations Processes

2.Development Production/Purchase

2. Cost structure, R&D Process

2. Gateway Process 2. See above

techniques that lead to more effective delivery of benefits. The costs and outcomes also become more predictable. It is designed to be applied to delivery programmes and procurement projects, including those that procure services, property and construction. Simply put, it is a review of a procurement project carried out at key decision points by experienced people, independent from the project teams.

This management tool was implemented at MöllerTech in 2003 and has been used since then.

Quality Management

MöllerTech applies a simple principle to quality management problem solving: Define, Measure, Analyse, Improve, and Control. Möller’s staff are trained and practised in Six Sigma to ensure high quality. Six Sigma is a disciplined data driven approach and methodology for eliminating defects in any process, from manufacturing to transactional and from product to service. To guarantee high quality and to keep optimising it, MöllerTech use the very latest production technology backed up by an effective Total Quality Management (TQM) system. TQM is, managing the total organisation using quality thinking and methods.

Figure 1.5 MöllerTech locations

Technologies

MöllerTech understands the particular properties of the available raw materials and selects the most suitable technology for every application. Core expertise lies in the areas of injection moulding, extrusion blow moulding and finishing, which are briefly explained below.

Blow Moulding is principally used for making hollow thermoplastic parts by melting plastic granulate

and forcing it through an extruder. The mould is then closed and compressed air is used to expand the

trapped tube or parison against the cavity wall to form a hollow body. Blow moulding is used for example to make air ducts, stowage systems and car seat valances.

Injection Moulding in contrast to blow moulding, in this process the molten plastic granulate is driven through fine nozzles into the mould. The finished moulding is then ejected once dimensional stability has been achieved. The surface of the part produced matches the interior surface of the tool, and thus the injection moulded parts can have smoothed or grained surfaces. This production process is particularly suitable for technical components, as injection moulding allows virtually any conceivable shape to be created. Examples in the automotive examples include rear deck lids, wheel arch covers and centre consoles as well as various stowage systems. Besides conventional injection moulding MöllerTech uses the following processes: in-mould decoration, two-component injection moulding and so-called gas-assist technology. The in-mould decoration process enables MöllerTech is also able to produce parts covered with a variety of decorative materials, such as textiles, foil or leather.

An example of Finishing is the ‘flocking’ of glove compartments, which involves applying flock fibres to an electrically charged adhesive-coated substrate. The flock fibres give the surface a velvety look and feel. Excess flock fibres are removed pneumatically or electro statically once the adhesive has dried. Laminating is used to refine surfaces with textile, TPO or PVC film. Applications include decorative instrument panel parts, pillar trim or centre consoles. Finishing also includes back foaming of foils or moulded coverings, and a wide variety of cutting techniques and assembly techniques.

Products

MöllerTech has been supplying the international automotive industry for several decades. In figure 1.6 some examples of the products they supply are shown.

Figure 1.6 MöllerTech parts

Many of these parts are a combination of MöllerTech parts and so-called ‘buying parts’ from the German ‘Kaufteile’. ‘Buying parts’ are manufactured parts (i.e. not raw materials) that MöllerTech does not produce itself. For example, MöllerTech get the order to produce the A-pillar for a new car and the A-pillar is required to have a speaker inside, it is up to MöllerTech to put purchase that speaker and place it inside the pillar. Automakers purchase complete units and not separate parts. They want the pillar in the right colour with the right speaker at right time to fit exactly so the pillar-supplier controls the process. This brings us closer to the problem that is the subject of this thesis, but before the problem is considered, the context of the research needs to be discussed.

1.4 Context of the Research

Before the reader can understand the problem to be studied in this thesis or any of the possible solutions, the context of the research must be defined. Industry analysis is essential in any decision- making process, if only to create a clear picture of the environment surrounding the problem. An important factor of this research is therefore the position of MöllerTech in the automotive industry.

This paragraph will sketch the current conditions of the automotive industry. Then the impact of the current automotive industry on the purchasing department of a first tier supplier is discussed, after which the real meaning of the phrase ‘supply management’ is looked at because it will be a principal theme of this thesis. There are many purchasers in the world that do not fully understand the meaning of ‘supply chain management’. The reason for this is that many purchasers were in the business before purchasing evolved into supply chain management.

The Automotive Industry

The automotive industry is a transforming industry. For the past 10 to 15 years it has gone through big changes. The rise of the Japanese manufacturers and their new production processes, turning out reliable cars and building strong networks has made it more difficult for European and U.S. rivals to sell cars. This is the reason that the “big three” (GM, DC, Ford) have been struggling to keep their numbers out of the red ink. According to Maxton (2005), there are two main elements to the troubles facing the “Industry of industries”: growth has come to a halt and the few really new markets such as China will be difficult to access. ⁴ But on the other hand the pace of change in the industry today is as dynamic as ever. Many technological and design changes are rolling out of the plants at this moment.

Think for example of hybrid cars, which run on a combination of electricity and petrol.

In the past the industry has gone through three, industry-altering changes. The first were the work and ideas of Henry Ford who applied mass-production techniques which led to mass standardisation.

4 Maxton, 2005

Alfred Sloane, from General Motors, overtook Ford by reintroducing a controlled level of customisation. After this Mr Toyoda and his company Toyota leapfrogged over the mass customisation with lean production. Lean production, also known as the TPS (Toyota Production System), means “doing more with less” ⁵ : less time, less inventory, space, labour and money. One of the most important elements of lean production is collaboration with suppliers. Close integration of the whole value chain from raw materials to finished product through partnership oriented relations with suppliers and distributors.

First-Tier Supplier

MöllerTech is both a first and a second tier supplier to the automotive industry. In reality 70% of the turnover made by MöllerTech is as a first tier supplier. In this research we will however consider MöllerTech as a first tier supplier.

Globalisation has caused the relationships between the automaker and suppliers to change. Because today cars all over the world need the same quality in components, we see first-tier suppliers take on new, larger roles in the industry. They are becoming “global suppliers”. In the past decade automakers, particularly American firms, have become “modular” assemblers with increased outsourcing, increasing the responsibility delegated to and the value added by the first-tier suppliers. Modular means constructed to facilitate easy assembly, not loose parts, but parts already put together to form an entire component. Of the products supplied by MöllerTech as a first-tier supplier, 90% are modules.

Another characteristic of first-tier suppliers to the automotive industry is the simultaneous geographic spread of the supply-base alongside the manufacturer’s newly established assembly plants. This way the manufacturer spreads the risk of new investments. The automakers ask suppliers to provide ‘the same part at the same price anywhere in the world’. The suppliers so shoulder part of the burden of meeting local content requirements and the difficult task of finding local second- and third-tier suppliers by accompanying the automakers to these new locations. It may provide suppliers certainty of revenue but it also provides them with the same risk as the automakers, namely overcapacity.

MöllerTech also follows its customers in this way. For example it has a plant in Jundiai (near São Paolo) built to be able to supply to the VW-plant. The plant in Châteauroux, France has also been built solely to supply PSA. But elsewhere MöllerTech does supply multiple automakers from its plants.

5 Kotelinikov

Plastics in the Automotive Industry

The use of plastics in the automotive industry can be traced back to the industry's infancy, mainly in such items as electrical components and interior fittings. The concept of actually designing vehicles around plastics came much later. ⁶ The Association of Plastics Manufacturers of Europe (APME) reports that 1.9 million ton of plastics were used by the automotive industry in Western Europe in 1997. ⁷ As noted earlier in this chapter, Möller produced its first plastic products for the automobile industry in 1952 for Mercedes. This was just ten years after Henry Ford started to experiment with polymer auto parts from soybeans. People started using plastics in cars for its characteristics. Plastics had a good weight-to-strength ratio, are resistant to chemicals, can be thermal and electrical insulators and can be produced in various ways to produce thin fibres or intricate parts.

But how long will plastics stay? Automakers are already demanding cheaper lighter and environmentally friendly products to replace plastics. As a result MöllerTech now already makes products from a combination of hemp and polypropylene.

Supply Management

The Institute for Supply Management (ISM) defines ‘supply management’ as the identification, acquisition access positioning and management of resources an organisation potentially needs to attain its strategic objectives. ⁸ The goal of supply management is to coordinate assets to optimise the delivery of goods, services and information from supplier to customer, in the process balancing supply and demand. ⁹ According to Caruso supply management also includes customer facing, dealing with getting the extended supply chain ready to execute on customer demand-and do it profitably. It combines; spend management and supplier relationship management with the supplier-facing portions of product life-cycle management and the supply chain. ¹⁰

Purchasing and Supply Management

In the past decade, the awareness among top managers of the positive financial impact a good purchasing and supply management can have, has grown. Purchasing is not a discipline but a function.

In the sixties and seventies of the last century buyers started focusing on lowering purchasing cost but tried to purchase the correct quantities to prevent line-shutdowns. Inventory management was of secondary concern and was done with manual systems. As a result, balance sheet use for inventory

6 Broge, n.d.

7 Broge, n.d.

8 ISM

9 Staff, 2004

10 Caruso, 2003

became too high. This became critical in the eighties and was exacerbated by advancing technology. In the late eighties the Japanese entered the game with kanban (a pull system that led to JIT, just-in-time) and kaizen (continuous improvement). Along with these new systems came the realisation of the need for two different types of purchasing personnel: ( 1 ) managers of operational and tactical issues and ( 2 ) broadly, strategically focused supply managers.

Purchasing has since evolved. The purchasing function was originally purely operational. Procurement was both operational and tactical. Supply management however is operational, tactical and strategic.

Strategic in this context means that there are more long term plans of action leading to future goals.

The value added by supply management to the strategic contribution of the firm has grown considerably since the function of purchasing started expanding. Supply management is again a broader concept than purchasing and procurement. It develops strategic acquisition plans, tries to improve itself continuously, participates in corporate strategy and is involved in supplier development.

Supply management is a progressive approach to managing the supply base that differs from a traditional arm’s length approach with sellers. ¹¹

The purchasing department at MöllerTech is evolving into a supply management department. This is due to MöllerTech’s own innovations and improvements but also due to pressure from automakers, who demand suppliers to organise their own supply chain to guarantee quality to their customers.

Because MöllerTech wants to stay on the list of preferred suppliers, it needs to keep up with innovations and go a long way to better the quality even more and continuously. This is however not the only reason MöllerTech wants to improve its supply management. Another reason is to minimise risk in its own supply processes and have control over its own supply chain.

Purchasing at MöllerTech, Bielefeld

The Purchasing department at MöllerTech Bielefeld, the base for this research study (hereinafter called MTD) is a centralised unit in the company. According to De Leeuw ¹² the degree of decentralisation is measured by the horizontal autonomy. Within the purchasing department the positions are decentralised although the purchasers also work in project teams together with other departments. In figure 1.7 the purchasing department is visualised. This is explained more thoroughly in Chapter 4.

Most of the purchasers at MTD have a technical background. In an organisation specialised in making of technical products the company finds that ‘It is easier to make a purchaser out of an engineer than an engineer out of a purchaser’.

11 Monzka, Trent, Handfield, 2004

12 De Leeuw 2000, p.425

Figure 1.7 The purchasing department

The next chapter will show the reader how the research study has been designed by explaining the

problems and how this thesis will attempt to solve these problems.

2. RESEARCH DESIGN

In this chapter, the main problem to be studied is defined. First, the reasons for conducting the research are explained after which the research objective is formulated. To advance from the research objective to the research question, a conceptual model is used. The conceptual model visualises the problem within the boundaries of the research study, and shows the reader what is aimed to be accomplished by carrying out this study.

2.1 Reason for Research

The automotive industry is extremely competitive. Automakers need to keep quality high and costs low in order to stay in the game. Production of many parts of cars today is outsourced, making suppliers increasingly important to the automaker. This is the reason “tier one automotive suppliers have had to increase quality, reduce cost, and improve their contribution to product development in order to satisfy the automakers. Now, it is time for second and third tier suppliers to get on board. The goal is to make all links of the automotive supply chain perform to same high standards that the car makers demand from their first tier suppliers.” ¹³

In today’s automobile industry, automakers put growing pressure on first tier suppliers to manage their own suppliers in the same fashion as they do. The reason for this study is that too much time is spent by first tier suppliers such as MTD on managing its own suppliers according to the automakers’

requirements (every customer has different requirements). MTD should however try to manage all its suppliers in one way to reduce risk and improve quality and not solely to satisfy its customers. Not only does MTD spend a great deal of time managing the suppliers differently for each customer, there is also confusion. Many people at MTD work on different projects at the same time, meaning constantly having to switch between different methods of work as the projects relate to different customers. The reason MTD does everything the customers ask is not solely because it is afraid to lose customers, but because MTD does not want the customers to do an audit as described in 2.2. These were the main reasons for MTD to commission research into possibilities of solving this problem.

13 Purchasing, (a magazine, no writer named), 1996

2.2 Problem Statement

According to De Leeuw determining the problem is establishing tension between the ‘current’

situation and the ‘desired’ situation. ¹⁴ The problem statement is divided into an objective, the essential question and appropriate sub questions. ¹⁵

Research Problem and Objective

As a first-tier supplier, the sole goal is to satisfy the customers, in this case the giants of the automobile industry. Because quality and time management are the most important factors MTD does not take any chances with its suppliers. Not only do the automakers check out their first tier suppliers and their production processes. They also check the techniques first tier suppliers use to evaluate their own suppliers and sometimes they even check the evaluation system of such second-tier suppliers.

That means indirectly also checking the third-tier suppliers.

MTD is often asked to show its customers how it selects and evaluates its suppliers. If the answers given do not satisfy the automakers, these perform an audit. Not only will they come and check the paperwork, they may stay for weeks on end. MTD can in such a case not stop the auditors involved from seeing all prices in their drive to ascertain that, only the guaranteed (depending on the customer) profit margin that is made from the project. At the same time, MTD needs to evaluate and select its own suppliers to reduce supply risk. The last problem of the evaluation and selection process is identifying risk when considering using new suppliers.

The problem as stated by MöllerTech:

‘Systematically’: in this case means ‘consistently’ and ‘in one manner’. This implies that today different methods are used for different customers. This is not efficient.

A supplier evaluation system exists within the company however this system is mainly targeted at current suppliers and is often adjusted to meet the standards of the customer. It does not provide a systematic assessment method of suppliers. The existing system will be taken in to account in the current analysis. This situation leads to the following objective for this research study.

14 De Leeuw 1997

15 De Leeuw, 1996

An objective analysis of the risk with respect to - in this case mainly new - suppliers does

not systematically take place. This could cause serious problems in the various phases of

a project, such as development, prototypes, pre-production series and production series.

Research objective:

The required selection and evaluation system should identify possible supplier risk. The earlier risk is identified the better it can be managed. The tool to be developed should be able to be integrated into MTD’s Project development (Projectreifegrad). This is an Excel-based tool, into which all data of each department involved, relevant to the project, are combined. Integrating the selection and evaluation system integrated in the ‘Projectreifegrad’ should provide the purchasers with continuous information on the existence of possible risk, the severity of the possible risk and the source of the possible risk.

2.3 Conceptual Design

According to Paul & Beitz, 2003, “conceptual design is that part of the design process in which, by identification of the essential problems through abstraction, by the establishment of function structures and by the search for appropriate working principles and their combination, the basic solution path is laid down through the elaboration of a solution principle.” ¹⁶ A conceptual model is developed in this study to gain understanding of the situation and the entities and attributes that influence the situation.

In this way the abstract picture provides the path to the solution. Another reason for conceptual design is that one may be able to look back and regain an overview of the situation, if lost or confused.

A conceptual model is the "mental map" that a designer builds in order to present information logically. Creating simple conceptual models helps analyse problems and make decisions. With regard to this study, the conceptual model represents how the researcher (designer) expects and believes the information encountered should - and does - fit together. Essential for usable design is that both the designer's conceptual model and the users' conceptual model are in alignment. For this study, two conceptual models are chosen, the first being the ‘Broad Model’. The broad model shows the scope of the research including attributes that will not be taken into account. The reason for choosing to create this model was to get a better understanding of the situation. The second model is the true, conceptual model. This shows the problem and lays down the basic solution path as referred to by Paul and Beitz.

16 Paul & Beitz, 2003

Development of an objective and integrated supplier selection and evaluation system

for a first tier supplier in the automotive industry, which mainly concentrates on new

suppliers and is at the same time compliant with all customer requirements.

The Broad Model

By creating a simple model (figure 2.1) that is relatively faithful to reality, it is possible to identify multiple forces acting on the problem and to determine how each force may multiply or cancel out the effects of other forces. This model is of a higher hierarchal level than the conceptual model in order to create a broad view of the situation. Part of the model in figure 2.1 was taken from the way Kamann ¹⁷ sees internal relations, showing purchasing as an important part of an organisation. The model is meant to give an idea of the position of MTD within the automotive industry. The darker (orange) segments are the main targets of the subject research. The ‘buying parts’, parts ‘already assembled’, are the only purchased products researched as the risk of quality problems is higher with these parts.

These higher-risk problems in quality are due to the fact that ‘buying parts’ again often consist of several parts.

This means the supply chain of these parts is deeper than for example the supply chain of raw materials. The lighter (yellow) segments are included in the subject research to create an understanding of the requirements for a successful supplier selection and evaluation system. These segments (in this case departments) have relationships with the main targets of the research study and therefore know what they require from such a system. NPD is the new production development department within MTD. The blue segments were left outside of the research.

Figure 2.1 The broad model

17 Kamann, 2005

Constraints and Limitations

To help guide decision-making during the research study, to maintain focus, stay on schedule and to help ensure success, the constraints and limitations listed below are used to define the project scope.

De Leeuw (1996) divides research constraints into constraints related to the process of the research and constraints related to the outcome of the research (i.e. the system). ¹⁸

Process constraints

The research was conducted for the purchasing department of MöllerTech Bielefeld in Germany (MTD) and MöllerTech Cwmfelinfach in Wales (MTW). These two plants are currently working together on a project for BMW/MINI. It is this project that will be used as basis for the research. The reason for this is that the purchasing department will actually be purchasing ‘buying parts’ for this project during the period this research project is carried out at the company. Past projects were also looked at to gain a better view of the possible situations and problems that can be expected when selecting and evaluating suppliers.

System constraints:

The system should help the evaluation and selection of future purchasing of ‘buying parts’.

The system should create a clear view of the suppliers and the risks the suppliers and their products could possibly create.

The system should meet the requirements of the customers and their supply chain requirements.

Scope of the research

The research is constrained to the evaluation and selection processes of the purchasing department responsible for purchasing the ‘buying parts’ in Bielefeld and in Cwmfelinfach. The actors that influence this system were included in the research as they have a great influence on the potential success of the system. These actors include departments within MöllerTech, (e.g. sales, production &

development, engineering); other more important actors are the customers outside MöllerTech (e.g.

BMW/MINI, DC and VW).

A zoomed-in view of the broad model shown earlier provides an overview of the actors and the relationships between them in this specific case at MTD, thus giving us the conceptual model for the research. It also shows the essential problem areas giving the research a basic solution path and a map to look back on during the research to regain overview if lost. In the conceptual model, the rest of the purchasing department is not shown. The purchasing process was however defined in order to get a

18 De Leeuw, 1996

view of the position of the selection and evaluation process within it. The process MTD wants to improve is only the selection and evaluation part of the purchasing process.

Conceptual Model

To clear the road for a successful research study, a research question was formulated. The conceptual model was used to get from the objective to the research question. ¹⁹ By visualising the objective and the problem, the conceptual model created a clear view of the complicated patterns and relationships between the actors.

In the conceptual model (figure 2.2) two strategies are shown, both depicting the supplier selection and evaluation system. In the first picture (the so-called ‘messy strategy’), the current situation at MTD is shown. The arrows from the customers to the supplier selection and evaluation system block stand for the requirements of the customers concerning supplier management. These are shown in different colours to highlight the fact that all customers require and expect different information and actions from MTD. Because MTD complies with all these requirements, it ends up sending different information to each of its customers. The box ‘Industry’ represents the industry standards and their requirements. The industry also acts as a separate customer, setting out its own basic requirements in order for a supplier to receive certificates (e.g. ISO 9001:2000). The customer requirements all differ and the strategy that needs to be followed therefore becomes unclear and ‘messy’.

Much of the purchasing process at MTD is done in a structured manner but a great deal is also done by gut-feeling or by personal experience of the particular purchaser. The information that is known or required from suppliers is shown in the arrows from the system to the suppliers. These are the first tier suppliers. The information from new suppliers however is never as complete as a purchaser would want it to be; therefore the arrows related to the new suppliers are dotted lines. The reason the information is not as complete as wanted is because MTD has no past history in relation to information flow from or experience with the new supplier and therefore no assessment of their performance. The information that is received from new suppliers is unstructured. This information needs to be completed, labelled and sorted to be able to evaluate these suppliers properly. In the process, third tier suppliers should also be taken into account. They are as much a quality risk as are second tier suppliers. MTD needs to find out what it really wants and needs to know from its suppliers to be able to evaluate and select them.

19 De Leeuw,

As stated earlier in this chapter the objective of this research is to create an integrated supplier selection and evaluation system. This objective is depicted in the bottom part of figure 2.2, the so- called ‘clear’ strategy. The information and strategy to evaluate the suppliers differs with each product.

If a system could be created where suppliers and products are divided into categories and risk could easily be identified, the risk could be managed accordingly (i.e. different approaches for different risk types). By creating a successful supplier evaluation and selection system at MTD there would be no need to exactly follow the customers’ dictated guidelines because customers would be satisfied with the way MTD deals with this. For this to be a success all the customers’ requirements would need to be included in the system. The result would be that only one stream of information goes to all customers, as shown in the conceptual model by the black arrow in the bottom picture, which would satisfy the requirements of all customers. By creating a complete and consistent evaluation and selection system where risk is identified early on, all customers can be satisfied while time and money is saved for MTD, its suppliers and the customers.

Figure 2.2 The conceptual model

Is it possible for MTD to select and evaluate suppliers, simultaneously minimising risk, assuring stability and achieving higher performance quality from their suppliers whilst meeting all customer demands?

2.4 Research Question

Now the main problem has been defined, the objective has been made clear and the conceptual model has visualised the problem and solution path, it is time for the research question to be formulated.

During the research, the answer to this question is sought. This leads to a solution to the problem and to recommendations concerning the objective.

Research question:

Sub Questions

In order to be able to answer the essential question, sub questions were formulated. These sub questions guide the reader through every segment of the research. By answering these sub questions an answer to the essential question and hence a possible solution to the problem is found. These sub- questions are.

1. What is required from the supplier evaluation and selection system?

By answering this question it will become clear what the system must be able to do. This should not only be meeting external customer requirements but also requirements from internal customers. As stated earlier, the system should also raise the quality of the products, preferably at a lower cost. The reason for identifying both sets of requirements before having evaluated the current situation is to ensure impartiality.

2. In which manner is the supplier selection and evaluation process managed at MöllerTech?

In order to improve the process one needs a good understanding of the current situation. Not only an

idea of how things are done, but also which tools are used. Important here will be the criteria used to

select a supplier and the manner in which the risk is identified. It is crucial that the weak points of the

current situation are found so that the research can focus on improving them.

3. How can a supplier selection and evaluation system be developed that identifies risk and at the same time satisfies all customers (internal and external)?

Identifying risk is the first step to reducing it. Important here is looking for possible solutions to the problem by considering the existing theories on the problem. Other possibilities could be to look at other companies and their supplier selection, to get ideas on what the best practice would be in MöllerTech’s case. Other companies will already have been looked at when answering the previous sub question because requirements customers have on the subject of supply management are usually a handbook on how they themselves handle supply management. This means the focus of this question will be on existing theories.

4. Is it possible to implement such a system and if so how?

Implementation of such a system needs buy-in and cooperation from the potential users. Change is never easy to implement in an organisation unless the users can immediately see the benefits.

Having formulated the essential research question and sub questions there is more clarity into what needs to be researched in order to reach the stated objective. The next step will be to select a methodology to tackle this problem. Then the approach can be chosen that shall lay out the path for the research.

2.5 Research Methodology

In this chapter the research approach was laid out. To find the right approach to the research, a methodology is needed to tackle the problem. To find the right method, one must look back at the research problem to see what the basics of the objective are. The objective in this case is the development of a selection and evaluation system of mainly new suppliers. This system is to be a part of the purchasing process. Because a supplier evaluation system already exists within the department, the new system would be an improved system. The supplier selection and evaluation process is the process at MTD that needs improvement. Process improvement methodologies are therefore reviewed.

After a methodology had been found that fit this problem it is explained and a research approach is

designed. The methodology and research approach are incorporated into a research model, which is a

representation of the thesis structure. With a research model, conducting the research becomes more

manageable. After the research model has been shown, an explanation is provided of which type of

information is needed and how it is gathered.

After searching through methodologies to find the most appropriate one, it became obvious that the most fitting one is the Business Process Improvement (BPI) method. The reason is that BPI’s focus lies on improving an existing process in an organisation, much like the evaluation and selection process at MTD.

In recent years, three key topics under the big umbrella of Business Process Improvement were Continuous Process Improvement (CPI), Business Process Reengineering (BPR), and Business Process Benchmarking (BPB). Each has received much attention and has been supported by a considerable amount of literature, empirical research and findings from business consultants and

academics. ²⁰ Continuous process improvement is desirable in the long run but the objective for now is improving the existing process. Some BPR methods include benchmarking. These will also be looked at and used in this research. For the above reasons the BPR method was chosen as methodology in this research study to tackle the problem and reach the objective.

Substantially revising their structure, BPR aims to improve business processes by dramatically changing the way in which the processes are managed and implemented. BPR is the analysis and redesign of business processes using objective, quantitative methods and tools and management systems to accomplish change or performance improvement. According to Hammer and Champy (1993) ‘BPR is about beginning again with a clean sheet of paper. It is about rejecting the conventional wisdom and received assumptions of the past’. Being a student and doing this study for 6 months means that beginning with a clean sleet should not be difficult as long as the information received is not directly presumed to be true. Davenport & Short define business processes as “a set of logically related tasks performed to achieve a defined business outcome.” ²¹ A process is “a structured, measured set of activities designed to produce a specified output for a particular customer or market. It implies a strong emphasis on how work is done within an organisation”. ²²

Two distinct approaches to BPR can be found in the literature, one top-down and the other bottom-up.

Firstly, the top-down approach established by Hammer and Champy ²³ is discussed. This methodology suggests that BPR should focus on determining how the strategic objectives of an organisation can be met without letting the existing processes constrict its thinking. Here the emphasis is on the process to- be and is coherent with the author’s step-change philosophy. As the change can be drastic, the key to

20 Lee, Chuah, 2001

21 Davenport & Short, 1990

22 Davenport 1993

23 Hammer & Champy, 1993

success in this methodology is to determine when change is healthy. The second approach, value- added analysis, outlined by Harrington ²⁴ , follows a more incremental change methodology. This bottom-up approach recommends modelling the existing process to achieve full understanding and then improving on it so that it meets the strategic objectives. Here the focus is on changing the process as-is by identifying opportunities for improving it.

Two things must be kept in mind while using either method. One is that even when using the top-down approach one must create an understanding of the existing process and carefully define the conversion from the current to the preferred future process. The other is that when using the bottom-up methodology there must not be too much time spent on the current process in order not to lose innovative thinking. A mixed approach might be a way to consider high-level changes without losing sight of the current processes. In fact, BPR studies may lead to recommendations on improving processes or sub processes, which may only require small changes. ²⁵

BPR recognises that business performance is ultimately dependent on the optimisation of core and support business processes. ²⁶ Six categories of BPR tools are defined:

1. Project Management 2. Coordination 3. Modelling

4. Business Process Analysis

5. Human Resources Analysis and Design 6. Systems Development

Of these, the “business process analysis” category and “modelling” are most important to a BPR project. ²⁷ The BPR analysis task typically consists of collecting data on the existing process and breaking it down into discrete activities. Modelling tools are used to make a model of something in order to understand its structure and workings ²⁸ . The basic framework of BPR will be used to support the different phases of the research.

In the study of BPR on its methodologies, tools and techniques by Kettinger, Guha and Teng ²⁹ , the writers show a survey of many methodologies with various stages and activities. Every methodology is built for a specific goal. However, the main activities are alike in all the different methodologies. In

24 Harrington

25 Information systems audit and control association, 2004

26 Alan Fowler, 1998

27 Manganelli, Klein, 1994

28 Klein

29 Kettinger et.al

this research study a combination of methodologies has been chosen so that it fits the objective. The main methodologies used were those of International Systems & Services (ISS) and of Oxford Associates. ³⁰ Other methodologies were considered to see if there were particular stages or activities which could add to the ones already chosen, but these seemed to fit the situation at MTD. In table 2.1 the steps formulated by ISS and Oxford Associates are shown. The basic BPR steps: envision, diagnose, redesign, reconstruct and evaluate, are identical in both approaches but are tackled in slightly different manners. In this research a combination of the two methodologies is used.

Table 2.1 Methodologies, Stages, & Activities

2.6 The Research Framework

“Analysing and defining a company’s business process is the single crucial step required to understand how an organisation works, how that organisation wants or needs to work, and how to go about bridging the gap between the two.” ³¹

The ISS and the Oxford Associates BPR methodologies are used as the framework for this research study. MöllerTech uses TQM and the TQM process – improvement – and – solving sequence. This process does not differ much from the BPR methods but BPR gives the research more clarity by looking at problems in slightly different ways because of its widespread use. The framework is a summary of the steps that were taken during the research. Before the framework is visualised the five steps and the actions that need to be taken in these steps will be explained.

30 Furey, 1993

31 Cousins & Stewart, 2002

Methodology Envision Diagnose Redesign Reconstruct Evaluate

ISS a. Identify/

Categorise Targets

b. Assess Business process

c. Design Business Process

d. Process Change

e. Monitor Business Process Oxford

Associates (Furey 1993)

a. Identify the Process’s Customer driven Objectives

b. Map and Measure Existing Process

c. Analyse &

Modify existing process d. Benchmark for Innovative, Proven Alternatives e. Reengineer the Process

f. Roll-out the

New process