The German plant of an international Swedish group of companies with 6,500 employees manufactures roof-mounted air conditioning systems for trucks and motorhomes. The products are sold both directly to OEM manufacturers and in the aftermarket. As the competence center for the development of the technology, the German site has the lead in the group. A new control electronics system for the air conditioning systems was now to be developed. The interim manager was hired to significantly reduce the costs of the control units previously produced in Germany and to generate economies of scale by relocating to Asia, in corresponding low-cost countries. At the same time, he was to establish a fallback position for series production in Europe in the event of disruptions in the supply chain. The savings target was set at around 33 percent.
Preparing the tender for the global market and compiling a longlist
Once the specifications for the next generation of control electronics had been defined, the interim manager prepared the tender for series production for the global market. Together with the engineering department, he identified potential suppliers and drew up the tender package. This resulted in a long list based on clearly defined criteria and references. It was assumed that each of these suppliers was capable of producing the control unit in accordance with the specifications. There were no regional restrictions when approaching suppliers. The companies on the long list produced in Europe, Asia (Malaysia, Taiwan and PR China) and in Germany.
Compromise found for the goals of cost reduction and fallback solution in Europe
Within the organization in Germany, there were concerns about relocating series production abroad, as there was no experience with production in emerging markets such as China. On the other hand, the company was familiar with the conditions in Asia, having successfully imported its commercial products from there for years.
The results of the tender were clear: the materials in the bill of materials (BOM) - all standard electronic components - could be procured at global market prices in both Europe and Asia. The production costs, on the other hand, spoke a different language. Here, the costs in Europe were significantly higher than in Asia. The task now was to find a compromise that met the cost target on the one hand, while realizing a fallback position in Europe on the other.
German company with production unit in China wins the contract
With this in mind, the interim manager defined the potential suppliers in a shortlist. A well-known German manufacturer of control elements stood out, which controlled a large production unit in China with German management. At the same time, the company was able to submit the best offer for its location in China. This supplier was therefore awarded the contract. However, with the proviso that a fallback position in Germany would be provided in the event of a production outage in China. This option was contractually guaranteed.
Savings targets significantly exceeded with a reduction of 50 percent
As a result, the interim manager was able to significantly exceed the targeted cost reduction of 33 percent. The reorganization of the supply chain resulted in a reduction in procurement costs of at least 50 percent or 1.75 million euros. With the agreed fallback solution, he was also able to secure 100 percent of production.
This enabled the client to establish its product, which was already successful on the market, as a margin supplier for the coming years.
