Supplier Business analyzes VW production/purchasing plans

Supplier Business (www.supplierbusiness.com), an IHS Global Insight Company, has published an in-depth study of Volkswagen’s production and purchasing strategies, including supplier selection, pricing policy, approach to quality, research and development, and modules and systems. The report, priced at $1,360, also includes lists of major suppliers by component sector.

The merger of VW and Porsche creates a group with four volume brands (Volkswagen, Audi, Skoda, and Seat), four niche brands (Lamborghini, Bentley, Bugatti, and Porsche) plus Commercial Vehicles and Scania.

After being the lead import brand in the United States back in the 1970s, VW lost much of its sales and carved out only a niche position in North America, according to Supplier Business. In 2008 it sold only 238,000 vehicles with a VW badge, compared to the 570,000 it was selling in 1970 and the 692,000 units in 2001. VW is targeting one million group deliveries in the U.S., which would mean quadrupling VW brand sales to 800,000 units and more than doubling Audi’s from 87,000 in 2008 to 200,000.

Modular platform strategy

VW is the market leader in Europe, China, and Brazil, and it’s adding production in Chattanooga, Tennessee. The firm has outperformed its peers in terms of standardization, according to Supplier Business, thanks to a sensible platform strategy that has resulted in substantial synergies and economies, particularly in purchasing and manufacturing costs. It now plans to shift from a platform strategy to the kind of modular platform strategy that Audi pioneered. The modular platform approach is intended to maximize synergies between models across brands of different segments by sharing a set of modules that represent up to 60% of a vehicle’s value.

According to Supplier Business, the introduction of the modular platform strategy across the VW Group’s different brands will have significant effects on purchasing side and will partially reshape the supply base. VW’s level of vertical integration, which has been higher than its peers, could be further boosted by the new modular platform strategy the car maker.

Since volumes per component will be increased for shared components, VW could decide to manufacture certain component families rather than buy them, thus reducing outsourcing to external partners and increasing the number of in-house operations, which already include exhaust systems, axles, steering systems, wiring harnesses and suspensions. Supplier Business believes that in other component areas it is less likely VW will yield an in-sourcing strategy as it has good partnerships with major tier-1 suppliers and can avoid the investments required to build up expertise and manufacturing capability.

Development cost reduction

The modular platform strategy will also accelerate of the development of new models and derivatives, but Volkswagen expects development costs to drop by 40% once the modular platform strategy is fully implemented.

The VW group Procurement division consists of two operational subdivisions, one managing the procurement of production materials, another for general supplies. The first subdivision includes five commodities: Interior, Exterior, Metal, Electric and Powertrain. The general procurement division is responsible for structure and equipment, aggregate and components assembly, vehicle assembly, services and group IT purchasing. A network of Regional Sourcing Offices (RSO) support sourcing activities locally.

Supplier Business reports that VW is aiming at improving the interface between the Purchasing department and its Engineering, Marketing and Production departments.

Volkswagen’s  modular platform approach promises to have a hefty impact on VW’s purchasing strategy when it is fully implemented at a group level, with two main architectures covering a good part of the car maker’s product offering, according to Supplier Business. VW reckons current synergies to be worth some €3 billion, and more when the future Porsche lineup is aligned with the platform strategy. VW is currently a key supplier of Porsche, accounting for over 30% of Porsche’s turnover.

Supplier Business notes that a strategic reorientation of VW’s supplier portfolio is ongoing, with plants in India, Russia and China taking a pivotal role. The research firm says these locations will not be used just to meet local content requirements but will become major sourcing locations to VW plants worldwide. A program called C3 Sourcing (Cost Competitive Countries Sourcing) is expected to help VW spread the cost advantages of low-cost locations to European and other international programs and production facilities.