Generating significant savings through China sourcing

Dragon Sourcing - 龙 源 Your Tailored Sourcing Approach to China

Business Case examples

Agenda

Š 2005 Dragon Sourcing. All rights reserved.

1.

Caterpillar

2.

Metso

2

Case Study : objective of the project was to generate significant savings through China sourcing while building capabilities to sustain the improvement on an on-going basis

1. Assess LCC opportunity for Castings, Forgings & Non Metallic categories

Spend category segmentation

Segment Cost Modeling

Segment prioritization for LCC sourcing

Assessment of LCC sources by priority segment (list of validated suppliers) RFQ on sample parts Develop Should cost model by priority segment

2. Define “to be” LCC Sourcing Operating Model Define operating model options

Assess LCC sourcing capabilities

© 2005 Dragon Sourcing. All rights reserved.

3

LCC implementation plan

LCC LCC Strategic Strategic LCC Sourcing Sourcing Strategic Wave 2 -…

Wave Sourcing 2 -…

Waves -…

Client has a tram of 45 buyers dedicated to sourcing for the export market Supplier Development Manager (1 p. + 1 EA) Human Resources Manager (1 p.)

CategorySourcing Sourcing Category Category Manager Manager Manager (4 p.)

Supplier Analyst & Developpers ( 32 p.)

Responsabilités

• Strategic Sourcing pour des dépenses agrégées au niveau mondial • Qualification des fournisseurs • Développement et suivi de l'évolution des fournisseurs • Accompagnement et gestion de la relation fournisseurs utilisateurs sur l'ensemble de la chaîne logistique © 2005 Dragon Sourcing. All rights reserved.

Supplier Quality & Excellence Team (1p.)

Experts Category Méthodes Sourcing Sourcing & Supplier Development Manager

(2 p.)

Certified Quality Managers / Auditors (4 p.)

Responsabilités

• Formation continue des Suppliers Analysts & Developers aux normes et procédures de qualification fournisseurs • Audits réguliers des procédures de qualification fournisseurs • Sélection des organismes certificateurs • Suivi de la satisfaction des utilisateurs 4

Responsabilités

• Développements et mises à jour méthodologiques sourcing, qualification et développement fournisseurs • Expertise support aux équipes

Spend categories were segmented to identify top priority part numbers for China sourcing Define segmentation criteria to reflect differences in product, manufacturing and supplier relationship characteristics Segment criteria 1

Segment criteria 2

a A

b

Profile each segment and check consistency

Segment criteria 3 i ii iii

Segment 1 Segment 2 Segment 3

i ii iii

Segment 4 Segment 5 Segment 6

Weighted average of Price/kg Segment Segment Segment Segment Segment Segment

c

Group segments if possible (by skipping a minor segmentation criteria)

Standard deviation of price/kg

Price/kg

Segment 3

1 2 3 4 5 6

Segment 3/4

Segment 1 Segment 2

Category

b

Illustration: FORGINGS

Steel castings segmentation criteria Criteria

© 2005 Dragon Sourcing. All rights reserved.

Segment 1/2 Segmentation criteria

a B

Segment 4

Criteria value

Type of material

Low Carbon Steel Other steel

Function/ Shape

Bracket Axel Housing

Weight

•High •Medium •Low

Quantity

•High •Medium •Low

Machining Y/N

Rough Finished

Assembly Y/N

Assembled Not assembled

5

This segmentation allowed to check the homogenous nature of the identified segments 3,82 €

7 000 000 € 6 000 000 €

3,30 € 3,05 €

4,00 € 3,50 €

2,99 €

2,95 €

3,00 €

2,60 €

5 000 000 €

2,50 €

2,08 €

4 000 000 €

1,79 €

2,00 €

3 000 000 € 1,50 € 2 000 000 €

1,00 €

1 000 000 €

0,50 €

0€

0,00 € S1 - AXLE HOUSING ASSEMBLY

S8 - SUPPORT

S7 - BRACKET/ HOUSING/ YOKE

S4 CROSSMEMBER

# of Suppliers

1

3

5

1

2

# Chinese Suppliers

/

/

1

/

% of rough

0%

0%

0%

# of Parts

8

31

8,1%

29,2%

Coefficient of Variation

© 2005 Dragon Sourcing. All rights reserved.

S3 - CAP - LOW WEIGHT

S2 - CAP - MEDIUM WEIGHT

1

2

1

1

/

1

/

0%

100%

0%

0%

0%

22

7

4

11

52

11

19,8%

8,7%

6,1%

10,7%

15,6%

16,2%

6

S5 - LEVER

S6 - SPROCKET

Analysing total supplier cost structure is an essential element towards identifying high priority segments...

Traditional Cost Structure (Illustrative) 100%

90%

80%

Logistics/Packaging Profit

Main Cost Drivers    

Number/weight of parts Supplier country / Number of suppliers Process integration (ex: machining) Forecast / schedule stability

Industry Consequences  Transportation: As customers value low inventory and as distances are increasing, an efficient supply chain and just in time solutions (warehousing, specialist packaging) will become more key as a competitive difference,

 Level of utilization  Supplier country  Commercial relation ships

 Overheads + Profit: Could potentially increase with industry consolidation and as more value added activities are introduced.

 Part design  Tooling origin / design / durability

 Depreciation : Casting industry is not capital intensive, automation is more driven by the process/the type of part than by volumes

 Supplier country  Process efficiency – depends on the supplier  Cycles

 Energy: as price/volatility of energy costs increase, suppliers will need to use financial tools to source at lower costs or find solutions (ex: generators) to absorbe the peaks

Overhead Depreciation

70%

Energy 60%

50%

Labor

40%

(rough casting + valueadded processes)

30%

     

Supplier country labor costs Type of Process Level of automation Part design (complexity) Quality requirements Productivity / efficiency / process optimization/control

 Finish and value added labor: Very labor intensive activities. As casters aim to expand post-casting value added (machining, assembly), migration to cheap labor areas will increase  Automation : as small part suppliers are already automated, are larger size part suppliers working on tooling/automation issues ?  Productivity : Need to develop process oriented suppliers and control their internal practices (internal rejection rate, six sigma, software, etc)

20%

Raw Materials 10%

0% © 2005 Dragon Sourcing. All rights reserved.

 Metal: as prices will continue to increase, casters and their customers will tend to focus on metal weight reduction (by reviewing the design, the material specifications, by changing processes to improve the yield rate) or on material substitutes (Ductile Iron)

 Material Specifications  Part design (yield)  Type of Process

7

... Particularly to model cost reduction potentials in different countries COST DIFFERENTIAL IN CASTINGS FOR SELECTED COUNTRIES Comparison for Cast Heavy Duty Blocks & Heads +5% -5%

$0.77/lb

$0 ,8 0

$0.72/lb Depreciation $0.07 $0 ,6 0

Depreciation $0.07

-20%

$0.69/lb

Overhead $0.07

Overhead $0.07

Other Variable $0.07

Other Variable $0.07

Energy $0.08

Energy $0.08 $0 ,4 0

Labor $0.31

Labor $0.35

Other $0.08

$0.57/lb Other $0.06

$0.58/lb

Depreciation $0.07

Other $0.06 Depreciation $0.07

Overhead $0.10

Overhead $0.10

Other Variable $0.07

Other Variable $0.07

Labor $0.05

-27%

Energy $0.10

Labor $0.13

Overhead $0.10 Other Variable $0.07

Energy $0.10 Labor $0.9

Materials $0.13

Materials $0.14

Materials $0.13

Materials $0.14

U.S.

Germany

Mexico

Brazil

Taiwan

Materials $0.14 South Korea

Source: Modern Casting, April 2003, UN Conference on Trade & Development, 2002; NADCA, United States Die Casting Industry, 2003

Š 2005 Dragon Sourcing. All rights reserved.

$0.53/lb Other $0.06

8

$0.52/lb Other $0.06

Depreciation $0.07

Depreciation $0.07

Overhead $0.10

Overhead $0.10

Other Variable $0.07

Other Variable $0.07

Energy $0.06

Energy $0.09

Labor $0.01

Materials $0.13

-28%

Other $0.08

Overhead $0.10 Other Variable $0.07

Energy $0.10

Labor $0.03

$0.64/lb

Depreciation $0.07

Depreciation $0.07

Energy $0.09

$0 ,2 0

$0 ,0 0

-12% -22%

Materials $0.14

India

Labor $0.006

Materials $0.14

China

In parallel a detailed analysis of the supply markets is conducted to identify qualified suppliers Chinese Casting Industry Profile General data: • Leading position in the global production of ferrous castings (2003: rank 2 behind the US) • Total casting production: 16,3 Mio metric tons • Supplier: – – – –

Over 30 thousand suppliers for four the casting industry About 100 suppliers have over 10 000 tons production capacity Most of the suppliers are subsidiaries of major engine makers Most of the suppliers are located in the 5 areas on the map below

Source : Casting Trade; GIA

© 2005 Dragon Sourcing. All rights reserved.

Recent Developments •

“China's foundry industry has developed fast in recent years fueled by the country's vast infrastructure projects,"

Latest Headlines: • •

•

8 June 2004 Italian foundries eye China 19 March 2004 Henan builds China's largest special vehicle production base. The Huajun Vehicle Co Ltd … will inject a total of 159 million yuan in construction of two auto projects 8 December 2003 100 Chinese Steel Producers Join VAI Seminar on Continuous Casting Technology

Modern Metal & Refining, Ltd. Nanchang Hongdu Foundry Nanfang Huitong Shareholding Co., Ltd. Ningbo Yongmao Group Company Offshore Solutions, Inc. National Players: Qinghai Shanchuan Foundry Group Co., Ltd. Dalian Beifang Founding Plant Shuangyashan Sanjiang Industrial Co., Ltd. Dingtian Science & Technology Co., Ltd. Tangshan Watson Die Casting Co., Ltd. Foseco Foundry (China) Co., Ltd. Wj Court And Sons Ltd. Giddings & Lewis Castings Xinjiang Tebian Electrician Shareholding Co., Ltd. Hudong Heavy-Duty Machinery Co., Ltd. Yan Nun Mfg Fty Jiangsu Daya New Packing Materials Co., Ltd. Liaoning Dongfang Superchargers (Group) Corp Yantai Lutong Accurate Alloy Co., Ltd. Yantai Ritter Precision Aluminum Industry Co., Ltd. Mcdonald Diecasting Ltd. Yin Fat Industrial Co., Ltd. Manoir (Yantai) Industrial Co., Ltd. International Players: Arrk Product Development Group Corus PLC Esco Corporation, Inc

9

209 casting and forging suppliers were pre-qualified throughout China

3

2 15

1 2

1

14

6 4

14

2 2

18 9

26 2

22

4

11

34 1 4 2

Š 2005 Dragon Sourcing. All rights reserved.

10

10

We qualified these suppliers through an extensive RFI process

类别描述及生产能力 类别 F. - IRON - BODY VALVE 如果您在工作表 3? ? "? " 请填此表格 1.

TN

请回答 列问题

销售额 (欧元)

Non utlised Production capacity

Production capacity

剩余生产能力 (吨/ )

现生产能力 (吨/ )

Max size and weight of components 2.

Length 3.

width 4.

此类别零 ,您能生产的最大尺 是什么? 长度 (毫米)

宽度 (毫米)

此类别零 ,您能生产的最小尺 是什么? 长度 (毫米)

宽度 (毫米)

高度 (毫米)

depth

Min weight and size of components 高度 (毫米)

重量 (公斤)

Machining capability ?

此类别零 ,贵公司是否本身能够提供精加工? 是

否

No

yes © 2005 Dragon Sourcing. All rights reserved.

重量 (公斤)

11

weight

RFI response example Cost related questions 2. What percent of your sub - cost for your quotation for passed years on the following areas (total 100%)? 去 以 各项成本在你们的报 中所占的比例(总计100%) Raw Management Variable Utilities Variable Fixed Margin material原材 labour labour 水电等 利润 overhead可 overhead固 料 管理人工 可变人工 变管理费用 定管理费用 50%

7%

5%

20%

3%

5%

Other 它

5%

5%

Score: 3. Please list your average process cost breakdown for forging good. 请分类列出你公司 均工艺费用 15% Score:

Lead time related questions

1.What was your 2002 and 2003 % on time delivery (based on your customer’s ship date)?

2002,2003 的按时交货率%(以客户的船期为准)?

2002 2003 95% 97%

Quality related questions 2. What weight / size of Forging products does your company produce? 贵公司生产何种重量/尺 的锻造产品 Weight Range (kg) Capable** Current 目前 重量范围 (kg) Product*产品* 生产能力** Minimum最小 97KG Maximum最大 〈300KG Size Range (mm) 尺 范围 Minimum最小 Maximum最大

Current 目前 Product*产品*

Capable** 生产能力** 〈2000mm

R&D related questions Development Tools 3. Please list the design and failure analysis tools you use in the development of new products/processes (e.g. Pro-E, FMEA, CAD, simulation, etc). 请列出你公司在开发新产品/工艺 使用的设计和失效分析工 (例如,Pro-E, FMEA,CAD, 仿真等) PRO-E, CAD, 仿真

© 2005 Dragon Sourcing. All rights reserved.

12

Our methodology allowed us to to identify high priority segments

Prioritization approach and criteria

59 segments Segment 1 Segment 2 Segment 3 Segment 4 Segment 5 Segment 6 … … …

Segment 54 Segment 55 Segment 56 Segment 57 Segment 58 Segment 59

Filter 1 Benefit potential

Filter 2 Risk

5 to 10 Prioritized segments for which sourcing strategy is developed after deeper analysis • China capabilities assessment • "should be" cost modeling

1.

2.

3.

4.

Total spend Total spend with China Total cost per Kg Factor cost content (Labor+Energy+Raw mat. vs Transport.)

5. Supplier switching costs

© 2005 Dragon Sourcing. All rights reserved.

1. Complexity of parts

(Nb of cores, raw material spécific; …)

2. Risk with current suppliers 3. Coefficient of variation 4. Complexity of segments (demand fluctuation; Nb of parts/volume per parts)

5. Existing China suppliers

13

STRATEGY • Segment 2 • Segment 25 • Segment 31 • Segment 37 • Segment 40

Example of prioritisation: iron castings High 10 Segment Name

I3- BODY VALVE

I13- PISTON & PLATE REACTION

Benefit Potential

I16- CASE

HCC Spend

Price / Kg

Labor content

Part Complexity*

# parts

I13 – PISTON & PLATE REACTION

0,6 M€

6,24

75 %

High

13

I11- GUARD ASSEMBLY

0,7 M€

4,04

65 %

Low

16

I12- PISTON

0,5 M€

3,49

58 %

Medium

17

I3- BODY VALVE

5,9 M€

2,66

56 %

High

26

I1- AXLE HOUSING - FINISHED

1,2 M€

2,27

42 %

Medium

2

I4- BRACKET

0,3 M€

3,46

60 %

Low

37

I14- PLATE

0,2 M€

2,25

40 %

Low

5

I15- COVER

0,4 M€

2,62

51 %

Low

25

I2- AXLE HOUSING - ROUGH

2,5 M€

1,13

20 %

Medium

19

I8- COUNTERWEIGHT

4,5 M€

0,65

10 %

Low

23

I11- GUARD ASSEMBLY I18- HOUSING ASSEMBLY/CENTER

I4- BRACKET

5 I17- HOUSING

I12- PISTON I5- CARRIER ASSEMBLY DIFFERENTIAL

I15- COVER I8- COUNTERWEIGHT

I6- CARRIER & CARRIER PLANET

I1- AXLE HOUSING - FINISHED

I2- AXLE HOUSING - ROUGH I10- HEAD

I7- WHEEL I9- TRUNNION

Low

I14- PLATE

0 10

5 High

0

Risk

Low

Segment with only HCC Suppliers

Segment with Current LCC Suppliers © 2005 Dragon Sourcing. All rights reserved.

14

Different sourcing options are identified

Highly Complex Casting Products

Medium Complex Casting Products

1. HCC Supplier Model

2. Hybrid: HCC Prototype/LCC Manufacturer

Client X Order

Client X Order

HCC Supplier

HCC Prototyping Supplier

Client X Assembly

LCC Supplier

LCC Supplier

3. Hybrid: HCC Supplier with LCC Facility Client X Order

4. LCC Supplier Model Client X Order

HCC Supplier LCC Supplier HCC Prototyping

Captive LCC Manufacturing Plant

LCC Supplier

High Cost, Low Risk

© 2005 Dragon Sourcing. All rights reserved.

Less Complex Casting Products

Client X Assembly

Client X Assembly

Low Cost, Medium Risk

Low Cost, Low Risk

Client X Assembly

Low Cost, High Risk Client X Function

15

HCC Function LCC Function

Agenda

Š 2005 Dragon Sourcing. All rights reserved.

1.

Caterpillar

2.

Metso

16

Steel castings represented €32m/year of spend Total = € 52 m 7 740 728 17%

Forge 12%

352 067 1%

6 181 075 14%

Fonderie 88%

31 471 479 68%

Acier

Dépenses 2004 © 2005 Dragon Sourcing. All rights reserved.

17

Fonte

Bronze

Aluminium

Key objectives of the programme are cost reduction et reduce exposure to one major LCC

Geographic breakdown of the spend

• High dependency on 1 LCC: – Country risk – Currency risk – Supplier risk

HCC3 3% HCC2 5% Others* 6% CHINA 8%

• Industrial strategy focused on increasing production in China

LCC2 9%

HCC1 15%

© 2005 Dragon Sourcing. All rights reserved.

• Steel castings is major element of BoM costs LCC1 54%

18

China has a 20% structural advantage vis-à-vis to the current LCC…

Reference Price* Index 100 €/kg

Reference Price* Index 100 €/kg

Labor

39%

"Should cost“ in LCC1* Index 0.67 €/kg

Raw materials

11%

Energy

14.5%

Molding

9%

"Should cost“ in China* 0.53 €/kg

7% 20% 17%

Machine depreciation

4.5%

9% 6% 5%

Overheads

22%

30%

Testing Supplier margin

6%

Ex works HCC1 © 2005 Dragon Sourcing. All rights reserved.

Ex works HCC1

Ex works LCC1 19

Ex works China

This advantage should be sustainable over time Comments

Wages index (1999 - 2003) and 2005 extrapolated for LCC1

• Labour cost 2.5 à 3x lower than in LCC1

180

1.15 €/h China (RMB) 168 LCC1 (local currency) 154

• Gap narrowed because of currency devaluation

2.67 €/h 140

27.17 €/h

European Country (USD) 126 LCC1 (USD) 114

• Trend got inversed in 2004

100

• China has phenomenal labour and productivity improvement reservoir

2.67 €/h LCC1 (USD) 79

60

1 999

2 000 LCC1 (USD)

2 001 LCC1 (local currency)

© 2005 Dragon Sourcing. All rights reserved.

2 002

2 003

European Country (USD)

2005 (extrapol.)

China (RMB)

20

Logistics costs reinforce the advantage of China vs LCC1 from LCC1

To factory 1

from China -21%

0,20 0,16

FROM CHINA TO Factory 1 Factory 2 Factory 3

EXW price

EXW

FOB price 0.069

EXW + 0.045 0.083

0.097

0.047

0.069

0.085

0.012

0.013

0.012

0.010

0.000

0.000

0 0.008 0.001 0.032

0 0.006 0.001 0.013

0.308 0.002 0.003 0.008

Ocean freight (no insurance needed) .. Freight (BAF & CAF excluded) 20' .. BAF & CAF .. Open top add. Charges Import customs & duties Terminal charges Import handling & Adm/BL fee Inland transport (no insurance)

1,50 1,30

DDP price

FOB + 0.12

FOB + 0.11

FOB + 0.41

DDP price

EXW + 0.16

EXW + 0.15

EXW + 0.46

1,19 1,03

Ex Works

Logistics & duties

DDP

Ex Works

0.16

0.15

from China

0.46

-20% 0,18

to be compared with

Logistics and duties from LCC1 (€/kg)

0,15

0.20

0.18

n/a

1,48 1,30

Ex Works

© 2005 Dragon Sourcing. All rights reserved.

DDP

To factory 2 from LCC1

Logistics and duties from China (€/kg)

Logistics & duties

21

1,18 1,03

Logistics & duties

DDP

Ex Works

Logistics & duties

DDP

The RFQ process generate three credible proposals

Supplier identification

Supplier shortlisting

Quotation analysis

RFI/RFQ

Criteria

80+ suppliers

• steel • component size • Export experience • Certification Quality

Reason for not responding • Production capacity fully utilised • Specs too complex • Components too big 17 3

Long list of suppliers © 2005 Dragon Sourcing. All rights reserved.

Shortlisted suppliers 22

Réponses to RFQ

The quotations were close to the output of the « should-cost » model 1.60 1.47 1.41

Price in €/kg

1.40

1.20

1.17

1.17

1.13

1.00

0.80

"Should cost" 1.00

"Should cost" 1.00

"Should cost" 1.03

0.83

0.83

0.83

.25/.35C -GR 90 60

Steel 320-560-M

steel G-20Mn5 (N)

"Should cost" 1.08

0.60

© 2005 Dragon Sourcing. All rights reserved.

23

Steel 12 MDV6

The savings potential varies from 6% to 34%

Usine 1

SAVINGS

Usine 2

Usine 3 (LCC1)

Best Case

Worst Case

Best Case

Worst Case

Best Case

Worst Case

k€

494.2

27.6

376.8

112.5

43.4

-28.2

%

39%

2%

33%

10%

15%

-10%

OVERALL SAVINGS

© 2005 Dragon Sourcing. All rights reserved.

from 140 to 914 k€ Or 6% à 34%

24