Procurement

New challenges arose for procurement in 2011 as the world economy continued to recover and the sales volume of the Volkswagen Group increased significantly. In addition to measures for offsetting rising commodity prices, the further optimization of supplier and procured component management – in compliance with our sustainability principles – was the focus of our activities. There was also an emphasis on developing new markets and continuous process optimization.

Our procurement strategy

Procurement has established four goals for itself, derived from the Group Strategy 2018: first, to provide market-centric premium quality and innovations at competitive prices; second, to meet cost targets and ensure the profitability of our products over their entire life cycle; third, to safeguard global volume growth through the permanent availability and consistently high quality of procured components; and fourth, to continue to raise employee satisfaction and the attractiveness of the procurement function.

Action areas have been assigned to each of these goals. Currently 30 programs with precisely defined measures and responsibilities for all brands and regions ensure that these goals are achieved. An annual variance analysis indicates whether the programs, and consequently also our strategy, need to be adjusted or if new programs must be devised.

Stable supply situation for procured components and raw materials

Rising vehicle sales and numerous product start-ups shaped the supply situation in 2011. Vehicles from our Chinese production facilities recorded particularly strong demand. At the same time, the trend observed in 2010 toward vehicles with luxury equipment features continued. Because of this, the need for procured components grew and changed. Procurement nevertheless assured the supply of procured components for all production and component plants.

The natural disasters in Japan and Thailand created special challenges for procurement. In cooperation with our suppliers and with the help of a promptly assembled task force that drew from across our brands and business fields, we prevented any negative impact on the supply situation. We were recently even able to increase our maximum production volumes versus our original annual plan. Contributing to this first and foremost is the ongoing process optimization in requirements, capacity and procured components management, as well as closer, continuously improved integration with all participating business fields.

The commodity markets in 2011 were once again shaped by high demand, accompanied by a simultaneous and significant rise in prices for input and raw materials. Prices were also highly volatile.

These effects were especially evident for rare earths due to several production and export restrictions, mostly in Asia. Because American and Australian companies intensified their efforts to develop additional sources of rare earths, the situation improved somewhat near the end of the reporting period. However, the market remains very unstable.

As in 2010, the prices for crude oil-based materials also rose in the first half of 2011, although the market stabilized later in the year at a high level.

Procurement reacted to these challenges with long-term contracts and other measures, with the result that effects on business activities were largely avoided.

Volkswagen has adapted to the situation in the commodities markets and has taken effective measures, such as establishing a supplier portfolio, structuring contractual periods strategically and continually optimizing the use of materials, for example for steel and with regard to material substitution, especially for rare earths.

Procured component and supplier management assures quality

We further stepped up our procured components management in 2011 because the number of vehicle start-ups and vehicle derivatives continues to grow and supplier markets are becoming ever more complex. Its goal is to minimize problems and bottlenecks prior to the start of production by monitoring the planning and production process early and actively. Procured component management also provides support during series production, for example in the event of disruptions, capacity bottlenecks, tool relocations, tool investment reviews, or supplier insolvency. In these situations, tool and process experts from the Procurement and Quality Assurance functions work together in close cooperation – an important factor for success. Procured components management was expanded in 2011 to encompass additional brands and regions and has since become an established part of these organizations.

Procurement and Quality Assurance also work together to optimize supplier management in the cross-divisional “Quality in Growth” program. The increasing complexity of the supply chain makes it necessary to consider not only the supplier itself but also the upstream stages of the value chain when contracting for selected components. In this context, the sub-supplier chain is evaluated more intensively in terms of process and therefore influences the contract award decision.

Localization and radical localization in new markets

We can cut costs at new production facilities by localizing, meaning the use of local procurement markets. Moreover, radical localization allows us to increase the share of value added generated by locally procured components. This is done by identifying cost-effective supply sources for raw materials in the respective region at an early stage. Material costs are thus reduced in close cooperation with Technical Engineering and Quality Assurance.

Based on the strategies of localization and radical localization, the established C3 Sourcing (Cost-Competitive Country Sourcing) program has the task of applying cost advantages from competitive procurement markets to vehicle production worldwide. In this way, synergies from local production are conveyed to components that are exported and used in plants in other countries without having to lower our quality standards. Suppliers are supported by the Group’s own regional offices, both in radical localization in the country in question and when exporting their components to Group production facilities in other countries. The C3 Sourcing program makes a significant contribution to achieving cost targets for new vehicle projects at the start of series production and to ensuring that we can make efficient use of new cost-effective procurement markets.

Process optimization in procurement expanded

The process optimization program in procurement was conducted for the third year in 2011. As an important element of the “Volkswagen Way”, the program is primarily based on the experiences and process knowledge of employees in this area. In various workshops, more than 150 of them developed numerous measures that have improved processes in procurement and related areas. In the second quarter of 2011, all employees in the procurement function were briefed extensively on these process improvements at training events in the Procurement Academy. The electronic process handbook supports the sustainable implementation of the measures and has been successfully deployed across the Company.

In 2011, additional brands and regions were included in the procurement process optimization program, namely the Audi, SEAT and ŠKODA brands, Volkswagen Commercial Vehicles and the sites in Mexico, Brazil, Argentina and South Africa. Identifying examples of best practices and other issues were the focus of these activities.

Sustainability in supplier relationships

An important responsibility in the procurement area is integrating our environmental and social standards into supplier management. Through its “sustainability in supplier relationships” concept, Procurement has been assuming environmental, economic and social responsibility together with its business partners since 2006. Since 2008, this concept has been expanded to all brands and all regions. Its main pillars are: the sustainability standards signed by the member of the Group Board of Management responsible for Procurement and by the Group Chief Compliance Officer as an important baseline for our business partners, an early warning system to minimize risks, transparency in the procurement process, and supplier monitoring and development. Each pillar is regularly reviewed and assessed. In addition, new staff are taught in their training to precisely identify possible shortcomings and improvement potential at suppliers on a continual basis.

In 2011, an Internet-based training module, available worldwide in nine languages, was also developed for our suppliers and will be made available on the Group Business Platform in 2012.

The sustainability procurement network also provided support in 2011 for the successful and timely implementation of this concept worldwide: the third series of events for supplier training took place in India.

Purchasing volume

The Volkswagen Group’s purchasing volume includes production materials, services and investments. In the reporting period – including the Chinese joint venture companies – it amounted to €110.2 billion; this was 22.9% higher than in the previous year. The proportion attributable to German suppliers was 39.3% (39.0%).

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PURCHASING VOLUME BY BRAND AND MARKET
€ billion		2011		2010		%
Volkswagen Passenger Cars		69.7		58.4		+19.5
Audi (incl. Lamborghini)		21.0		17.0		+23.6
Škoda		6.6		5.1		+30.3
SEAT		3.4		2.9		+17.0
Bentley		0.5		0.3		+64.4
Volkswagen Commercial Vehicles		2.4		1.9		+26.4
Scania		5.1		4.1		+22.9
MAN		1.5		–		–
Volkswagen Group		110.2		89.7		+22.9
Europe/Remaining markets		75.4		59.2		+27.2
North America		4.7		4.2		+12.7
South America		8.1		7.8		+4.6
Asia-Pacific		22.0		18.5		+19.2