The document provides examples of business cases for sourcing components from China. It discusses segmentation criteria used to identify high priority spending categories for sourcing. It also outlines the process used to pre-qualify over 200 Chinese casting and forging suppliers, including conducting an extensive request for information (RFI) process. Sample RFI responses from suppliers are shown that provide information on costs, production capabilities, quality and delivery. Cost modeling was also performed to analyze total cost structures and identify potential cost reductions in different countries.

1. Business Case examples
Dragon Sourcing - 龙 源
Your Tailored Sourcing Approach to China

2. © 2005 Dragon Sourcing. All rights reserved.
2
Agenda
1. Caterpillar
2. Metso

3. © 2005 Dragon Sourcing. All rights reserved.
3
Assess LCC
sourcing
capabilities
Assess LCC
sourcing
capabilities
Define operating
model options
Define operating
model options
LCC Strategic
Sourcing
Wave 2 -…
LCC Strategic
Sourcing
Wave 2 -…
LCC Strategic
Sourcing
Waves -…
1. Assess LCC opportunity for Castings, Forgings & Non Metallic categories
2. Define “to be” LCC Sourcing Operating Model
LCC
implementation
plan
Assessment of LCC
sources by priority
segment
(list of validated
suppliers)
Assessment of LCC
sources by priority
segment
(list of validated
suppliers)
Segment
Cost Modeling
Segment
Cost Modeling
Develop Should cost
model by priority
segment
Develop Should cost
model by priority
segment
Spend category
segmentation
Spend category
segmentation
Segment
prioritization for
LCC sourcing
Segment
prioritization for
LCC sourcing
RFQ on
sample parts
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

4. © 2005 Dragon Sourcing. All rights reserved.
4
Category Sourcing
Manager
Category Sourcing
Manager
Supplier Development
Manager (1 p. + 1 EA)
Supplier Quality &
Excellence Team (1p.)
Category Manager
(4 p.)
Category Sourcing
Manager
Experts Méthodes
Sourcing & Supplier Development
(2 p.)
Supplier Analyst &
Developpers
( 32 p.)
Certified Quality
Managers / Auditors
(4 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
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
Responsabilités
• Développements et mises à jour
méthodologiques sourcing,
qualification et développement
fournisseurs
• Expertise support aux équipes
Human Resources
Manager (1 p.)EXEMPLE CLIENT
Client has a tram of 45 buyers dedicated to sourcing for the export market

5. © 2005 Dragon Sourcing. All rights reserved.
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Illustration: FORGINGS
Steel castings segmentation criteria
Criteria 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
Spend categories were segmented to identify top priority part numbers for
China sourcing
Segment
criteria 1
Segment
criteria 2
A
a
b
c
B
a
b
Category
i
ii
iii
i
ii
iii
Segment 1
Segment 2
Segment 3
Segment 4
Segment 5
Segment 6
Segment
criteria 3
Define segmentation criteria to reflect
differences in product, manufacturing and
supplier relationship characteristics
Weighted
average of
Price/kg
Segment 1
Segment 2
Segment 3
Segment 4
Segment 5
Segment 6
Standard
deviation of
price/kg
Profile each segment and
check consistency
Price/kg
Segmentation
criteria
Segment 1
Segment 2
Segment 3 Segment 4
Group segments if possible
(by skipping a minor segmentation criteria)
Segment 1/2
Segment 3/4

6. © 2005 Dragon Sourcing. All rights reserved.
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This segmentation allowed to check the homogenous nature of the identified
segments
3,82 €
2,60 €
2,95 €
1,79 €
2,08 €
2,99 €
3,05 €
3,30 €
0 €
1 000 000 €
2 000 000 €
3 000 000 €
4 000 000 €
5 000 000 €
6 000 000 €
7 000 000 €
S1 - AXLE HOUSING
ASSEMBLY
S8 - SUPPORT S7 - BRACKET/
HOUSING/ YOKE
S4 -
CROSSMEMBER
S5 - LEVER S6 - SPROCKET S3 - CAP - LOW
WEIGHT
S2 - CAP - MEDIUM
WEIGHT
0,00 €
0,50 €
1,00 €
1,50 €
2,00 €
2,50 €
3,00 €
3,50 €
4,00 €
# of Suppliers 1 3 5 1 2 1 2 1
# Chinese
Suppliers / / 1 / 1 / 1 /
% of rough 0% 0% 0% 0% 100% 0% 0% 0%
# of Parts 8 31 22 7 4 11 52 11
Coefficient of
Variation 8,1% 29,2% 19,8% 8,7% 6,1% 10,7% 15,6% 16,2%
EXEMPLE CLIENT

7. © 2005 Dragon Sourcing. All rights reserved.
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Analysing total supplier cost structure is an essential element towards
identifying high priority segments...
 Material Specifications
 Part design (yield)
 Type of Process
 Supplier country labor costs
 Type of Process
 Level of automation
 Part design (complexity)
 Quality requirements
 Productivity / efficiency / process
optimization/control
 Supplier country
 Process efficiency – depends on the supplier
 Cycles
 Number/weight of parts
 Supplier country / Number of suppliers
 Process integration (ex: machining)
 Forecast / schedule stability
 Level of utilization
 Supplier country
 Commercial relation ships
 Part design
 Tooling origin / design / durability
Main Cost Drivers
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Logistics/Packaging
Profit
Overhead
Depreciation
Energy
Labor
(rough casting + value-
added processes)
Raw Materials
 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)
 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)
 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
 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,
 Overheads + Profit: Could potentially increase with industry
consolidation and as more value added activities are introduced.
 Depreciation : Casting industry is not capital intensive, automation
is more driven by the process/the type of part than by volumes
Industry ConsequencesTraditional Cost Structure
(Illustrative)

8. © 2005 Dragon Sourcing. All rights reserved.
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... Particularly to model cost reduction potentials in different countries
Comparison for Cast Heavy Duty Blocks & Heads
$0 ,0 0
$0 ,2 0
$0 ,4 0
$0 ,6 0
$0 ,8 0
Materials
$0.13
Labor
$0.31
Energy
$0.08
Other
Variable
$0.07
Overhead
$0.07
Depreciation
$0.07
$0.72/lb
U.S.
$0.57/lb
$0.64/lb
$0.52/lb
Materials
$0.14
Labor $0.03
Energy
$0.09
Other
Variable
$0.07
Overhead
$0.10
Depreciation
$0.07
Other
$0.06
Mexico Brazil China
$0.58/lb
Materials
$0.13
Labor $0.05
Energy
$0.10
Other
Variable
$0.07
Overhead
$0.10
Depreciation
$0.07
Other
$0.06
Materials
$0.13
Labor
$0.35
Energy
$0.08
Other
Variable
$0.07
Overhead
$0.07
Depreciation
$0.07
$0.77/lb
Germany Taiwan South
Korea
India
$0.69/lb
Materials
$0.14
Labor
$0.13
Other
Variable
$0.07
Overhead
$0.10
Depreciation
$0.07
Other
$0.08
Energy
$0.10
$0.53/lb
Materials
$0.14
Labor
$0.9
Other
Variable
$0.07
Overhead
$0.10
Depreciation
$0.07
Other
$0.08
Energy
$0.10
Materials
$0.14
Labor $0.01
Energy
$0.06
Other
Variable
$0.07
Overhead
$0.10
Depreciation
$0.07
Other
$0.06
Materials
$0.14
Labor $0.006
Energy
$0.09
Other
Variable
$0.07
Overhead
$0.10
Depreciation
$0.07
Other
$0.06
-5%
-20%-22%
-12%
-27%
-28%
+5%
Source: Modern Casting, April 2003, UN Conference on Trade & Development, 2002; NADCA, United States Die Casting Industry, 2003
COST DIFFERENTIAL IN CASTINGS FOR SELECTED COUNTRIES

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In parallel a detailed analysis of the supply markets is conducted to identify
qualified suppliers
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
Recent Developments
• “China's foundry industry has developed
fast in recent years fueled by the
country's vast infrastructure projects,"
Source : Casting Trade; GIA
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
International Players:
Arrk Product Development Group
Corus PLC
Esco Corporation, Inc
National Players:
Dalian Beifang Founding Plant
Dingtian Science & Technology Co., Ltd.
Foseco Foundry (China) Co., Ltd.
Giddings & Lewis Castings
Hudong Heavy-Duty Machinery Co., Ltd.
Jiangsu Daya New Packing Materials Co., Ltd.
Liaoning Dongfang Superchargers (Group) Corp
Mcdonald Diecasting Ltd.
Manoir (Yantai) Industrial Co., Ltd.
Modern Metal & Refining, Ltd.
Nanchang Hongdu Foundry
Nanfang Huitong Shareholding Co., Ltd.
Ningbo Yongmao Group Company
Offshore Solutions, Inc.
Qinghai Shanchuan Foundry Group Co., Ltd.
Shuangyashan Sanjiang Industrial Co., Ltd.
Tangshan Watson Die Casting Co., Ltd.
Wj Court And Sons Ltd.
Xinjiang Tebian Electrician Shareholding Co., Ltd.
Yan Nun Mfg Fty
Yantai Lutong Accurate Alloy Co., Ltd.
Yantai Ritter Precision Aluminum Industry Co., Ltd.
Yin Fat Industrial Co., Ltd.
Chinese Casting Industry Profile

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209 casting and forging suppliers were pre-qualified throughout China
2
6
4
102
14
3
4
34
4
11
1
9
2
26
1
2
15
2 18
22
2
1
14

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We qualified these suppliers through an extensive RFI process
如果您在工作表3? ? "? "请填此表格
1. 请回答下列问题
年销售额 (欧元) 现生产能力 (吨/年) 剩余生产能力
(吨/年)
2. 对此类别零件,您能生产的最大尺寸是什么?
长度 (毫米) 宽度 (毫米) 高度 (毫米) 重量 (公斤)
3. 对此类别零件,您能生产的最小尺寸是什么?
长度 (毫米) 宽度 (毫米) 高度 (毫米) 重量 (公斤)
4. 对此类别零件,贵公司是否本身能够提供精加工?
是 否
类别描述及生产能力
类别 F. - IRON - BODY VALVE
TN Production capacity Non utlised Production capacity
Max size and weight of components
Length
width
Min weight and size of components
depth
weight
Machining capability ?
Noyes

12. © 2005 Dragon Sourcing. All rights reserved.
12
RFI response example
2. What percent of your sub - cost for your quotation for passed years on the following areas (total 100%)?
去年以下各项成本在你们的报价中所占的比例(总计100%)
Raw
material原材
料
Management
labour
管理人工
Variable
labour
可变人工
Utilities
水电等
Variable
overhead可
变管理费用
Fixed
overhead固
定管理费用
Margin
利润
Other
其它
50% 7% 5% 20% 3% 5% 5% 5%
Score:
3. Please list your average process cost breakdown for forging good.
请分类列出你公司平均工艺费用 15%
Score:
1.What was your 2002 and 2003 % on time delivery (based on your customer’s ship date)?
2002,2003年的按时交货率%(以客户的船期为准)?
2002 2003
95% 97%
Cost related questions
Lead time related questions
Quality related questions
2. What weight / size of Forging products does your company produce?
贵公司生产何种重量/尺寸的锻造产品
Current 目前
Product*产品*
Minimum最小
Maximum最大 97KG 〈300KG
Current 目前
Product*产品*
Minimum最小
Maximum最大 〈2000mm
Size Range (mm)
尺寸范围
Capable**
生产能力**
Weight Range (kg)
重量范围 (kg)
Capable**
生产能力**
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/工艺上使用的设计和失效分析工具(例如,Pro-E, FMEA,CAD, 仿真等)
PRO-E, CAD, 仿真

13. © 2005 Dragon Sourcing. All rights reserved.
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Prioritization approach and criteria
Our methodology allowed us to to identify high priority segments
Filter 1
Benefit potential
1. Total spend
2. Total spend with China
3. Total cost per Kg
4. Factor cost content
(Labor+Energy+Raw mat. vs
Transport.)
5. Supplier switching costs
Filter 2
Risk
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
Segment 1
Segment 2
Segment 3
Segment 4
Segment 5
Segment 6
…
…
…
Segment 54
Segment 55
Segment 56
Segment 57
Segment 58
Segment 59
Segment 1
Segment 2
Segment 3
Segment 4
Segment 5
Segment 6
…
…
…
Segment 54
Segment 55
Segment 56
Segment 57
Segment 58
Segment 59
59 segments
• China capabilities
assessment
• "should be" cost
modeling
STRATEGY
• Segment 2
• Segment 25
• Segment 31
• Segment 37
• Segment 40
STRATEGY
• Segment 2
• Segment 25
• Segment 31
• Segment 37
• Segment 40
5 to 10 Prioritized segments for which
sourcing strategy is developed after
deeper analysis

14. © 2005 Dragon Sourcing. All rights reserved.
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Example of prioritisation: iron castings
Segment with only HCC Suppliers
Segment with Current LCC Suppliers
Segment Name 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
I1- AXLE HOUSING
- FINISHED
I3- BODY VALVE
I8- COUNTERWEIGHT
I11- GUARD ASSEMBLY
I18- HOUSING
ASSEMBLY/CENTER
I2- AXLE HOUSING
- ROUGH
I4- BRACKET
I5- CARRIER ASSEMBLY
DIFFERENTIAL
I6- CARRIER & CARRIER
PLANET
I7- WHEEL
I9- TRUNNION
I10- HEAD
I12- PISTON
I13- PISTON & PLATE
REACTION
I14- PLATE
I15- COVER
I16- CASE
I17- HOUSING
0
5
10
0510
Risk
BenefitPotential
Low
Low
High
High
Segment with only
HCC Suppliers
Segment with
Current LCC
Supplier

15. © 2005 Dragon Sourcing. All rights reserved.
15
Different sourcing options are identified
HCC
Prototyping
Supplier
Client X
Assembly
Client X
Order
Low Cost,
Medium Risk
LCC
Supplier
LCC
Supplier
LCC
Supplier
HCC Supplier
Client X
Assembly
Client X
Order
Low Cost, Low
Risk
HCC Prototyping
Captive LCC
Manufacturing
Plant
HCC Supplier
Client X
Assembly
Client X
Order
High Cost,
Low Risk
1. HCC
Supplier Model
2. Hybrid: HCC
Prototype/LCC Manufacturer
3. Hybrid: HCC Supplier
with LCC Facility
LCC Supplier
Client X
Assembly
Client X Order
Low Cost,
High Risk
4. LCC Supplier
Model
Client X Function
HCC Function
LCC Function
Highly Complex
Casting Products
Medium Complex
Casting Products
Less Complex
Casting Products
ILLUSTRATIVE

16. © 2005 Dragon Sourcing. All rights reserved.
16
Agenda
1. Caterpillar
2. Metso

17. © 2005 Dragon Sourcing. All rights reserved.
17
Steel castings represented €32m/year of spend
Fonderie
88%
Forge
12%
Dépenses 2004
Total = € 52 m
6 181 075
14%
7 740 728
17%
352 067
1%
31 471 479
68%
Acier Fonte Bronze Aluminium

18. © 2005 Dragon Sourcing. All rights reserved.
18
HCC2 5%
HCC1 15%
Others* 6%
LCC2
9%
LCC1 54%
CHINA 8%
HCC3 3%
Key objectives of the programme are cost reduction et reduce exposure to one
major LCC
• High dependency on 1 LCC:
– Country risk
– Currency risk
– Supplier risk
• Industrial strategy focused on
increasing production in China
• Steel castings is major element of
BoM costs
Geographic breakdown of the spend

19. © 2005 Dragon Sourcing. All rights reserved.
19
6%
30%22%
5%
4.5% 6%
9%9%
17%
14.5%
20%
11%
39%
7%
Ex works HCC1 Ex works LCC1
China has a 20% structural advantage vis-à-vis to the current LCC…
Labor
Energy
Raw
materials
Molding
Machine
depreciation
Overheads
Testing
Supplier
margin
Ex works HCC1 Ex works China
Reference Price*
Index 100 €/kg
Reference Price*
Index 100 €/kg
Reference Price*
Index 100 €/kg
Reference Price*
Index 100 €/kg
"Should cost“ in LCC1*
Index 0.67 €/kg
"Should cost“ in LCC1*
Index 0.67 €/kg
"Should cost“ in China*
0.53 €/kg
"Should cost“ in China*
0.53 €/kg

20. © 2005 Dragon Sourcing. All rights reserved.
20
Wages index (1999 - 2003)
and 2005 extrapolated for LCC1
LCC1 (USD) 114
LCC1 (USD) 79
LCC1 (local currency)
154
European Country (USD)
126
China (RMB) 168
60
100
140
180
1 999 2 000 2 001 2 002 2 003 2005
(extrapol.)
LCC1 (USD) LCC1 (local currency) European Country (USD) China (RMB)
This advantage should be sustainable over time
• Labour cost 2.5 à 3x lower than in
LCC1
• Gap narrowed because of currency
devaluation
• Trend got inversed in 2004
• China has phenomenal labour and
productivity improvement reservoir
CommentsComments
2.67 €/h2.67 €/h
27.17 €/h27.17 €/h
1.15 €/h1.15 €/h
2.67 €/h2.67 €/h

21. © 2005 Dragon Sourcing. All rights reserved.
21
Logistics costs reinforce the advantage of China vs LCC1
1,30
1,50
0,20
Ex Works Logistics &
duties
DDP
1,03
1,19
0,16
Ex Works Logistics &
duties
DDP
To factory 1
from LCC1 from China
-21%-21%
1,30
1,48
0,18
Ex Works Logistics &
duties
DDP
1,03
1,18
0,15
Ex Works Logistics &
duties
DDP
To factory 2
from LCC1 from China
-20%-20%
Factory 1 Factory 2 Factory 3
EXW price
FOB price
Ocean freight (no insurance needed) 0.069 0.083 0.097
.. Freight (BAF & CAF excluded) 20' 0.047 0.069 0.085
.. BAF & CAF 0.012 0.013 0.012
.. Open top add. Charges 0.010 0.000 0.000
Import customs & duties 0 0 0.308
Terminal charges 0.008 0.006 0.002
Import handling & Adm/BL fee 0.001 0.001 0.003
Inland transport (no insurance) 0.032 0.013 0.008
DDP price FOB + 0.12 FOB + 0.11 FOB + 0.41
DDP price EXW + 0.16 EXW + 0.15 EXW + 0.46
0.16 0.15 0.46
0.20 0.18 n/aLogistics and duties from LCC1 (€/kg)
to be compared with
EXW
FROM CHINA TO
EXW + 0.045
Logistics and duties from China (€/kg)

22. © 2005 Dragon Sourcing. All rights reserved.
22
The RFQ process generate three credible proposals
17
3
80+ suppliers
Shortlisted
suppliers
Réponses to RFQ
Criteria
•steel
• component size
•Export experience
•Certification Quality
Reason for not responding
•Production capacity fully utilised
•Specs too complex
•Components too big
Long list of
suppliers
Supplier identification Supplier short-listing RFI/RFQ Quotation analysis

23. © 2005 Dragon Sourcing. All rights reserved.
23
The quotations were close to the output of the « should-cost » model
1.17 1.17
1.41
1.47
0.83 0.83 0.83
"Should cost"
1.00
"Should cost"
1.00
"Should cost"
1.03
1.13
"Should cost"
1.08
0.60
0.80
1.00
1.20
1.40
1.60
.25/.35C -GR 90 60 Steel 320-560-M steel G-20Mn5 (N) Steel 12 MDV6
Pricein€/kg

24. © 2005 Dragon Sourcing. All rights reserved.
24
The savings potential varies from 6% to 34%
Usine 1 Usine 2 Usine 3 (LCC1)
Best Case Worst Case Best Case Worst Case Best Case Worst Case
SAVINGS
k€ 494.2 27.6 376.8 112.5 43.4 -28.2
% 39% 2% 33% 10% 15% -10%
OVERALL
SAVINGS
from 140 to 914 k€
Or 6% à 34%