Design to Cost strategy for Auto OEM and Production Partnerships

1. US Automotive Industry
DtC Programs for Automotive OEMs and Tiers 1&2
May 2009

2. Approach proposed & Business Model
Contents
1
Business cases
Perspective on cost reduction in the Automotive sector
Next steps proposed
1

3. … while incentive systems and
technical exchanges between
OEMs and Tier 1&2 are central in
German & Japanese approaches
… while major German &
Japanese OEMs and Tier 1 invest
more in supplier development in
emerging countries
… while key vendors management
and development is a key activity of
German and Japanese OEMs
… while delegation of components
conception is the dominant model
in Europe & Japan
… while Japanese & German
OEMs encourage more
collaboration with key vendors
Key vendors are poorly incentived
by OEMs to bring innovative cost
reduction ideas …
US OEMs and Tier 1 leverage
Low-cost countries sourcing
mainly to benefit from enormous
hourly labor wage advantages …
Major US OEMs management
programs of key vendors are
not innovative …
Major US Tier 1 are integrated
late in the conception process …
USA "Big Three" push for hard
negotiations with their vendors
driving down their profitability…
Product cost optimization in automotive – a
popular but contentious subject
On almost
every aspect
of automotive
product cost
optimization
and global
sourcing there
are major
differences in
approach
between the
US and best-
in-class actors
2

4. Leveraging
competitive
pressure in
supply market
Low
High
Group A
Group B
VW
Opel
GM
Audi
Low High
Leveraging product design
from supply market
Purchasing segmentation matrix
EXAMPLE DIRECT
MATERIAL AUTOMOTIVE
Mercedes
BMW
Porsche
Toyota &
Honda
Pressure
vs.
innovation
Best-in-class OEMs leverage product design
optimization rather than competitive pressure
3
Chrysler
Renault
-Nissan

5. The approach builds on trust and joint optimization of the entire system…
… leading to outstanding results
“How much pressure to reduce price is applied
by the car manufacturers with which you work?”
“What is the opportunity to make acceptable
ROI with the car manufacturer you supply?”
“How willing to reward cost saving ideas
are the car manufacturer you supply?”
“Which car maker gets the lowest prices?” “Which car maker gets the best quality?”
“Which car makers would you like to make
more or less business with?”
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
Toyota
BMW
Honda
Volvo
PSA
Skoda
SEAT
Fiat
Renault
Audi
Nissan
M-B
GME
VW
Ford
GME
Ford
Fiat
VW
SEAT
Nissan
Skoda
PSA
Renault
M-B
Audi
Honda
Volvo
BMW
Toyota
GME
Ford
VW
Fiat
SEAT
M-B
Renault
Nissan
Audi
Skoda
PSA
Honda
Volvo
BMW
Toyota
GME
Ford
Fiat
VW
SEAT
Skoda
M-B
Nissan
PSA
Renault
Honda
Audi
Toyota
Fiat
Ford
GME
SEAT
Skoda
M-B
VW
PSA
Renault
Volvo
Nissan
Audi
Honda
BMW
Toyota
Ford
Fiat
GME
SEAT
Skoda
VW
Audi
Nissan
Honda
Volvo
PSA
Renault
M-B
BMW
Toyota
Volvo
BMW
Source: Regenius
Toyota is still the benchmark, with an institutionalized
supplier development approach delivering outstanding
results
4

6. Japanese supplier of Japanese OEM
Japanese supplier of US transplant in
Japan
US supplier of EU OEM
Differences between US and Japanese OEMs in supplier
management: Japanese OEMs receive the best quality at
the lowest price
* Price at ramp-up/price stated in the contract
** Average price change per year after ramp-up
Adherence
to target
price*
Yearly price changes**
-6 -4 -2 0 2 4
160
140
120
100
80
60
40
TrendJapan: price reduction USA: price increase
6
Components
analyzed
• Bumpers
• Front seats
• Dashboards
• Instrument panel
Suppliers analyzed
• 9 US suppliers of US OEMs
• 16 suppliers of US transplants
(8 from US, 8 from Japan)
• 25 Japanese suppliers of
Japanese OEMs
Japanese
suppliers of
Japanese OEMs
• Stay true to
target price
through
ramp-up
• Share
productivity
improvements
with OEMs
%
5

7. Results achieved after optimizing product conception
and specifications are promising
Savings
Percent
Power train
Oil seal
Thermostat
Steel
fastener
Chassis/body
Glass
Disc-brake
Weather
strip
Others
Plumbing
Condenser
Compres-
sor bracket
Assist grip/
sun visor
Achieved after joint approach between OEMs and key vendors (product redesign,
specifications rationalization and simplification, despecing, resourcing)
10
50
20
40
Ø 30
20
30
30
Ø 27
30
50
40
Ø 40
6

8. Driver's window (2 cases), safety belts, intake manifold, steering
wheel, headlight distance controller, driver's window, overhead lamp
Ignition system, roof trim,
radio, air conditioning
Door locks, door paneling, gear, mounting devices, wheel
covers, casing tube, rack and pinion power steering gear
Fixings, wooden
parts, door trim
Outside rear mirror, holder for H7 light, wiper
system, instrument cluster, wiring harness
Condenser, interior parts, instrument panel,
electronic component, windscreen, bumper
Steering column, air distribution box, doors, mechatronic system, carpet, fuel system,
mirror, protection sheet, suspension system, suspension strut, drive shaft, wheel brake
Body parts (2 cases), cockpit, and air ducts, seats, seat support, seat adjustment, safety
belt, airbag, exhaust system, steering column (2 cases), steering gear, convertible roof
Carpet (2 cases), lights, axle, brake calipers, foot controls, tank, roof hatch,
shutter, locking system, rain and water protection, water tank, wiper blades
Electronic control unit,
cover, wiring, clutch
Back module,
front module
EXAMPLES BY SAVINGS ACHIEVED, ROUNDED TO NEAREST MULTIPLE OF 5%
Source: Regenius DtC database
41 – 45%
36 – 40%
31 – 35%
50 – 55%
46 – 50%
26 – 30%
21 – 25%
16 – 20%
11 – 15%
6 – 10%
0 – 5%
Design-to-Cost (DtC) is an extraordinarily effective
lever to improve profits – Automotive case examples
7

9. Kalypso’ value proposal is focused on redesigning the
relations with key vendors and products/services
specifications
Demand
management
Technical
levers
Purchasing /
Negotiation
Supplier
relations
Purchasing
cost
optimization
levers
• Demand management
– Eliminate demand
– Reduce frequency
– Encourage substitution
– Impose tigther process and
tracking
• Redesign to cost
– Value engineering/value analysis
– Collaborative cost reduction process
with suppliers
• Product specification
improvement
– Conduct product value analysis and
engineering
– Substitute materials
– Product deproliferation
– Pursue system buying alternatives
– Optimize life cycle costs
• Relations restructuring
– Establish/develop key suppliers
– Employ strategic alliances/ partnering
– Examine strategic make versus buy
– Vertical integration
– Develop integrated supply chain
• Joint process improvement
– Reengineer joint processes
– Share productivity gains
– Integrate logistics
– Support supplier operations improvement
• Globalization
– Expand geographic supply base
– Develop new suppliers
– Profit from global supply/ demand imbalances
• Best price evaluation
– Compare “total” costs
– Model “should-costs”
– Renegotiate prices
– Unbundle pricing
• Volume concentration
– Consolidate number of suppliers
– Pool volume across units
– Redistribute volume among suppliers
– Combine volume from
different categories
Panorama of the 8 strategic levers of purchasing optimization
8

10. Breakdown of Realized Material Cost Savings by Type of Action
Percent
3%
2%
2%
3%
42%
33%
15%
Supplier change
Renegotiation
Modularization
Volume bundling
Design changes
Specification changes
Standardization
40% Purchasing-driven60% Engineering-driven
Realization of the Full Cost
Savings Potential Requires
Going Beyond a Purchasing
Driven Approach to Attack
Engineering-driven Levers
CLIENT EXAMPLE
Key prerequisites:
– Cross-functional
teamwork
– Supplier
involvement
Source: Regenius
Achieving major cost improvements today
requires a very technical approach
9

11. Three critical levers for Product competitiveness
and sourcing performance have to be addressed
• How to cluster components for differentiated engineering and sourcing
strategy?
• How to take into account the evolution of critical cost factors for a long
term sourcing strategy?
1- Understand
“dynamic”
costs
• Short term vs. long term trade offs?
• How to restructure and redesign relations with key vendors?
• How to integrate them early in the conception-development process?
2- Organize for
performance
• Current performance and trajectory of key suppliers?
• Which panel strategy for the mid to long term?
• How to develop best vendors ?
3- Pick and
shape your
suppliers
Key issues

12. Our qualifications: We have served some of the
best-in-class actors in the Automotive Industry
BMWBMW
JCI EuropeJCI Europe
FaureciaFaurecia
MercedesMercedes
Renault-NissanRenault-Nissan
PSAPSA
BoschBosch
MahleMahle
MatraMatra BehrBehr
AixamAixam EberspaecherEberspaecher
11Source: Regenius
11

13. Major impacts can be generated through product design-to-
Cost and relations restyructuring with key vendors
Major German OEM
Scope: € 1 450 M of spare parts
Savings generated: 17% (€ 246 M)
Key levers deployed: Product range rationalization, joint improvement of parts
specifications with key vendors, introduction of new technologies
Major french OEM
Scope: € 850 M of components
Savings generated: 14% (€ 119 M)
Key levers deployed: Restructuring of relations with key vendors (incentive system
design and deployment, redesign-to-cost institutionalized approach, sourcing of
alternative materials and components
Major US Tier 1
in Europe
Scope: € 900 M of parts and components
Savings generated: 18% (€ 162 M)
Key levers deployed: Product range rationalization, redesign to cost with R&D and key
vendors, joint improvement of parts specifications with key vendors, introduction of new
technologies, negotiations with Tier 2 vendors
Major German Tier 1
Scope: € 650 M of parts and components
Savings generated: 22% (€ 143 M)
Key levers deployed: Change of raw materials, redesign to cost with R&D and key
vendors, joint improvement of parts specifications, sourcing in eastern countries
12

14. Kalypso qualifications vs. "Best-in-class" competition
• Comprehensive tools and methodologies. Kalypso uses
multiple technical and organizational levers to generate
savings in areas that the “cost-killing” model can’t reach, and
achieve results that last
• Specialization and expertise. Kalypso specializes in
purchasing optimization, and our consultants have extensive
global experience in various industries
• Exclusive purchasing and idea databases. Kalypso s
uses robust, proprietary databases with over 20 million
quantitative data entries, including prices, cost structures
and more and a 3 000 technical ideas database
• Global network of proven suppliers. Kalypso has
cultivated a network of reliable suppliers in emerging
countries around the world, including China, India and
Eastern Europe
• A proven record of success. Kalypso has conducted more
than 200 programs for major groups worldwide, generating
an average savings of 16% within our assigned purchasing
categories
• Success-fee based compensation. We believe that our
primary obligation is to help our clients reduce their costs
and improve profitability. Therefore, we base our fees on a
percentage of the savings we generate for each client
• Leading to larger, quicker,
and sustainable savings
• Uncovering/initiating related
opportunities, e.g., improving
capital productivity, engineering,
and/or manufacturing
effectiveness, design-to-cost
and supply chain management
performance
13
13

15. Approach proposed & Business Model
Contents
14
Business cases
Perspective on cost reduction in the Automotive sector
Next steps proposed
14

16. Program design
and targets Ongoing refinement and development of spend information
Ongoing relations realignment and
restructuring
Reorganization of
relations between OEMs
and tier 1&2 vendors
• Build spend
diagnostic
• Set-up
methodology for
sourcing teams
• Select team
members
• Solidify senior
management
support
• Set ambitious
targets
• Change information capture and reporting systems to
ensure ongoing performance and capability
• Support teams
• Develop TCO and saving opportunities
• Define and execute sourcing strategies
to capture savings
• Build capability to capture and sustain
savings year on year
• Prioritized spend
map
• Early skill
assessment
~ 2 – 3 months Ongoing
~ 6 – 8 months ~ 3 – 4 months (each)
• Evaluate current
relations and need for
organizational support
• Identify and prioritize gaps
• Change relations, performance
management, and resource levels in
OEMs and Tier 1&2 organizations
4 – 6 months 12 – 18 months Ongoing
Wave 1 Sourcing Teams Wave 2 Wave 3 Wave 4
On-
going
waves
A typical DtC improvement program begins by a
diagnostic phase
• Short- and long-term
savings
• Organizational
anchoring
processes and tools
• Organization for
sustainable
improvements
End
products
15

17. A 5-Step Diagnostic Identifies Savings
Potential, & Mobilizes the Organization
ActivitiesDeliverables
Savings analysis and
prioritization
Data and spend
analysis
Opportunities
assessment
Diagnostic
Castings
Piping
Elec.
cabinets
Impact
for A.T.
H
i
g
h
L
o
w
Supplier market complexity
L
o
w
H
i
g
h
• First list of
opportunities
• Final list of opportunities
• Applicable levers and
strategies
• Financial stakes
• Prioritization of potential
actions
• Final savings evaluation
• Action plan and associated risks
• Required resources
• Program governance
• Interviews
• Data extraction
• Spend analysis
• Identification of
savings
opportunities
• First evaluation of
savings potential
• Deep dive for each
category/saving
opportunity
­ PSM strategies
­ PSM processes
­ Pricing
­ Specifications
­ Techniocal levers
­ Global sourcing
opportunities
• Final identification of
potential savings
• Documentation of
applicable levers
• Benchmarks vs
experience Regenius
• Analysis of ease of
implementation
• Elaboration of action plan (key
actions, program governance,
resources, timeframe, …)
• Measure definition of savings
potential
• Identification of key
competencies
• Business cases
on savings
opportunities
Kick-off
• Internal
communication
issued
• List of
interviewees
• Validation of
diagnostic scope
• Identification of
key interviewees
• Internal
communication
1 3 4 52
Phase 1 : Preliminary phase Phase 2 : Savings assessment

18. Business Model: Kalypso will have in charge the Program Office and
will conduct and monitor the Diagnostic and implementation tasks
(including monitoring subcontractors roles & contributions)
Diagnostic
Iterative
savings
potentials
evaluation
Data collection part-level
completed by Material group
Creative ideas
Feedback to suppliers
(target prices)
Revised offers from
suppliers
Status saving potential
Confirmed
recommendations
Validated savings
potentials
Pricing
information
Modifications
to recommen-
dations
Subcontractors/Experts
OEMs and Tier 1
Virtual
Engineering
Recommen-
dations
Implementation Plan
and Timing
Potential
targets
Consolidated Data collection
Check competitiveness
of components
Selected
parts
Kalypso
Implementation
roadmap
17
Technical
information

19. We will act as a Process Hub
US authorities
Subcontractors and
experts
KalypsoOEMs & Tier 1&2
• Will bring their expertise in engineering and sourcing
• Diagnostic phase: will act as a subcontractor of
Kalypso
• Implementation: Will deal directly with OEMs and
Tier 1
• Will promote the approach
• Will fund the Diagnostic phase on a fixed-
fees basis
• Diagnostic phase: will provide required date
and information and interact with Kalypso
and its experts
• Implementation: will be charged on a
success fees basis
18

20. Approach proposed & Business Model
Contents
19
Business cases
Perspective on cost reduction in the Automotive sector
Next steps proposed
19

21. Peel-and-stick heat
elements
Sewn-in heat elements
Suspension boot
Seat
belt
Lumbar
support
Base
Mechanical
suspension
Seat, frame, backrest
Seat tilt
Arm-
rest
29% cost
reduction
Seat heating
The starting point of the approach is to tear down a
product into functional groups – Automotive seat
example
20

22. Material
Bearing type
Weight (g)
• Forged steel
• 2nd
Generation
• 8,058
• Cast Iron
• 1st
Generation
• 8,379
• Cast Iron
• 1st
Generation
• 7,330
• Cast Iron
• 1st
Generation
• 8,386
• Cast Iron
• 1st
Generation
• 9,569
“War room” with more than
25 complete suspensions
from competitors
Client model Competitor A Competitor B Competitor C Competitor D
• Similar architecture
• Equivalent performance base/ weight
• Likely low cost solutions
• Maximum geographic coverage
The benchmarking of competitors’ products is a very
powerfull and simple way to identify major axis of
reconception
21

23. Comparing product concepts is very powerfull:
Overview of disassembled door panels
Supplier 1 (Product concept 1)
Supplier 3 (Product concept 3)
Supplier 2 (Product concept 2)
Supplier 4 (Product concept 4)
22

24. Headlights: Analysis of existing concepts and ideas for
improvement
VW Passat
Audi A4
Concept differences in existing models
Levers and specific ideas for
concept standardization
Material concept
• PC instead of APEC plastics
for bezel
• No clips for pane fixation
Design concept
• Common projection technology
• Common adjustment system
of lighting distance regulation
Assembly concept
• Headlight fixation with 3 instead of
4 screws
• Use plastic bolts instead of
aluminum
Estimated
total financial impact
EUR 20 million
Concept of
reflector
configuration
Overall headlight
concept with
different number
of parts
Connectors and
joint design
Geometry of
outer housing
Major differences
23

25. Example of technical optimization for wiring
harnesses
Today
Future
Savings
Description • Change of the massage concept to
pneumatic gates for both front seats
• Use of 1 gate valve instead of 7
separate valves
7 valves
1 valve
Qualitative
assessment
Same functionality with 4 programs
(fast, slow, soft, hard)
Smaller range of tolerance possible
Lower quality costs
-24%
After
optimi-
zation
Before
24

26. Heater mat – Optimization of attachment methods
1. Peel and stick (common solution)
2. Sewn in (used for thick plus pads, expensive stock for all variants necessary)
3. « Anchored » (trim attachment, hog rings etc.)
4. Tag pin (cheap, not preferred from manufacturing)
25

27. Examples of improvements that were implemented for
heating mats
Stitched-on
technology
 Fixation of heating wires
between 2 layers of
fleece or foam
 Heating wires are
stitched onto one layer
of fleece
 Save 1 layer of
foam/fleece and more
efficient production
process
Lever Initial situation Technical idea Impact
Duratherm
technology
 Stainless steel wires for
high exposure areas of
heating mat
 Use Duratherm wires
instead of stainless
steel
 Lower price of
Duratherm wires but
same durability
Tag-pin
attachments
 Heating Mats attached
to seats by “peel &
stick”
 Attachment of heating
mats by tag-pins
 Save sticking area
(glue and cover) on
heating mats
Standardization
of temperature
Control
 Different methods of
temperature control and
different ECUs and
sensors
 Standardize concept
where possible and
standardize sensors and
ECUs
 Cost reduction by
standardization
synergies
Print labels
 Identification information
mainly put on mats by
sticking separate labels
 Identification information
mainly to be printed on
mats
 Cost reduction by
savings labels and
process time
26

28. Input
• Existing design of a transverse link
(Audi A8)
• Target
– Reduce weight (i.e., material and fuel
consumption)
– Maintain stiffness properties (drivability)
– Improve product life (fatigue)
• Design already a good start (any other method failed)
• Optimize the material distribution for a given
value of stiffness and for a given level of strength
Output
• Simulation results (Design proposal after Topology
optimization)
• New design with 10% weight reduction, 45% stress
reduction (i.e., longer life)
A direct approach also works – Example of weight
reduction that led to a significant cost reduction
(Topology optimization – Transverse link AUDI A8)
27

29. Product Benchmarking – Case study example:
Car Bumpers
Car B
In case of an accident
• Bumper breaks
• Car body is designed for 800 kN buffer
pressure
• Only local deformation occurs because the
car body is made of aluminum
• Preassembled driver's cab module must be
replaced (duration <2 working days)
Car A
In case of an accident
• Each shock absorber absorbs 150 kN
over a deflection distance of 80 mm
• Requirement for inexpensive solution
– More deflection travel
– "Designed failure points", i.e.,
inexpensive components which are
destroyed in the event of an accident
100
16
Car B
GRP part
Car A
PU foam on complex
die-cast frame
Costs
Car A
Costs
Car B
-84%
Die-cast frame PU foam
Car
bodyShock absorbers
Car body
GRP bumper
28

30. Detailed Value Analysis of even “optimized” products can
bring surprising results
STEERING COLUMNS
Assemblies Functions Ideas (examples)
• Standardized fork
Attach to drive gear
• New fork production method
• Lower cost bearings in Kardan joints
(new supplier)
Provide flexible torque/
position coupling
• Simplified design of rubber insulator
(elimination of disposable assembly aid)
Sound/vibration
isolation
• Alternative concept for energy
absorbing tube
.
.
.
Absorb energy in
crash
• Open instead of hollow gripProvide gripping
surface
Cost savings
16% for product A,
21% for product B
• Standardize left/right parts
.
.
.
Guide column
Bear steering wheel
• Elimination of third bearing
Linkage
Shaft
Height
adjustment
"These products are
optimized, there is no more
fat to trim"
– Chief engineer
.
.
.
.
.
.
.
.
.
.
.
.
Steering column
29

31. INDEX
Weight reduction of structural components can
reduce cost by 10%
30
10% weight
reduction reduces
part cost by 4%
10% thickness
reduction reduces
part cost by 5%
Stamped
part
Injection
molded part
5
55
40
SG&A
Production
cost
Raw Material
cost
5
45
50
SG&A
Production
cost
Raw Material
cost

32. Intake manifold redesign – Parts view
31
Final designInitial state
DtC basic concept:
systematic iterative
analysis of improve-
ment opportunities
• Eliminating/Inte-
grating parts
• Improve parts
manufacturability
• Maximize ease of
assembly
Example
for "optimization
of product for
assembly"

33. Approach proposed & Business Model
Contents
32
Business cases
Perspective on cost reduction in the Automotive sector
Next steps proposed
32

34. A typical DtC project in the automotive
industry over 9 - 10 months
• Demonstrate potential
success of DtC in 3 - 4
pilot vehicle modules,
e.g., cockpit, interior,
front module, seats
• Unleash full DtC
potential: rollout
across all modules
of a vehicle
• Transfer and institu-
tionalize DtC to gain
a lasting competitive
advantage across
brands, vehicle, and
vehicle segments
Mid-
range
Com-
pact
…
Alfa Fiat …
Brands
Ve-
hicle/
Seg-
ments
… …
… …
…
156 Stilo …
Punto
Pilot: 6 - 8 months  12 months Ongoing
33
33

35. Our approach is gradual and starts with a 2
months diagnostic
Diagnostic:
2-3 months
Pilot launch:
Idea generation
Implementation
• Prepare project
– Derive target
– Establish team and
infrastructure
– Establish cost structure
– Define work plan
• If possible, start or conduct
reverse engineering
• Conduct analyses and
generate cost reduction
ideas
• Document ideas on idea
sheets and select most
promising ones for
follow-up
• Implement ideas, incl.
– Line-up of suppliers and
negotiation of prices
– Update of drawings and
calculations
• Unfalteringly control action
implementation and
financial effect
34