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Annual Report

Procurement

The recovery of the global economy in 2010 presented procurement staff with fresh challenges, one of which was developing strategies to offset higher commodity prices. It was also necessary to align supplier and procured component management with the new situation in compliance with our Sustainability Principles. As in previous years, procurement activities concentrated on the development of new markets and the continuous optimization of processes.

Procurement strategy

Procurement has derived four goals for itself from the Group Strategy 2018: first, to ensure market-oriented premium quality and innovations at competitive prices; second, to meet cost targets and guarantee the profitability of our products over their entire lifetime; third, to safeguard global volume growth through permanent availability and consistently high quality of procured components; and fourth, to maintain customer satisfaction and the attractiveness of procurement at a constantly high level.

We have identified action areas for each of these goals and drawn up 24 programs with precisely defined measures and responsibilities for all brands and regions. By performing annual variance analysis we can now align the programs and consequently also our strategy to the general conditions in procurement.

Supply situation for procured components and raw materials

Whereas in 2009 the government subsidy programs in many countries triggered an increase in unit sales of compact cars, 2010 saw increased demand for vehicles from the premium segments with luxury equipment features. Procurement succeeded in managing increases and changes in material requirements that this shift in demand entailed, supplying procured components to all component and vehicle plants. This was especially the case at our production facilities in China, which had to contend with a sharp rise in demand. Key factors contributing to this smooth alignment were the systematic improvements in processes, especially in capacity, requirements, and procured component management, and the increasingly close integration with all divisions involved.

During the reporting period, the commodity markets developed in step with the global economy. The spot markets registered substantial price increases sparked by rising demand, speculation on listed commodities and a changed pricing system for iron ore. As a result, the price situation on the international steel markets remained strained, with large fluctuations in the prices of all commodities.

Volkswagen was quick to take steps to counter this trend and continued in the same vein in 2010. Based on the globally applicable procurement strategy, our focus was on the strategic orientation of the supplier portfolio. We closely integrated our local companies in China, India, Russia and the United States in particular into this process.

In addition, we are working at high speed on ways of reducing materials usage and increasing the utilization rate – for example by systematically pursuing our lightweight construction strategies or by substituting tools with materials that were optimized for the specific applications.

Quality assurance through procured component and supplier management

In view of the increase in the number of vehicle production start-ups and the growing complexity of the supplier markets, we have further intensified our procured component management introduced in 2007. Tool and process experts from the Procurement and Quality Assurance divisions work hand in hand to ensure a successful start of production for new vehicle models, followed by incident-free series production. Procured component management has become an integral part of our local organizational structures, including in the international markets and regions.

The basic idea behind procured component management is that regional teams are incorporated in the planning of the production start-up from an early stage in order to minimize problems and bottlenecks shortly before SOP. Procured component management also provides support during series production, for example in the event of failures, capacity bottlenecks and tool relocation. Our experts coordinate the necessary tool and process optimizations locally in close cooperation with suppliers around the world; this minimizes the yield loss rate and ensures a consistent supply of components.

In the cross-divisional “Quality in Growth” program, Procurement collaborates with Quality Assurance on supplier training. Given the increasing complexity of supplier structures, supplier management is designed not only to consider the supplier but also incorporate the upstream stages of the value chain in its job order contracting for selected components. In this context, the sub-supplier chain will be given greater importance in the future prior to contracting in the hopes of influencing the contract award decision.

Greater localization through expansion into new markets

The new production facilities in India, Russia and the United States provide numerous opportunities for Group procurement. Firstly, localization – using local markets for local production – allows us to reduce costs. Secondly, the local suppliers are a potential supply source for our production facilities in other regions as well. Through what is known as radical localization we are increasing the share of value added generated by locally procured components by trying to find cost-effective supply sources for raw materials in the relevant regions at an early stage and in doing so optimize the cost of materials. Here, Procurement works closely with the Technical Engineering and Quality Assurance divisions, with which it agrees on the proportion of locally procured components.

The C3 Sourcing (Cost-Competitive Country Sourcing) program introduced in 2008 builds on the two above-mentioned strategies of localization and radical localization. The objective of this program is to harness cost advantages in competitive procurement markets for European vehicle projects. We have succeeded in leveraging and expanding synergies from local production for the export of components while adhering to Volkswagen’s 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 is going a long way to helping Volkswagen meet its cost targets for new vehicle projects at the start of series production and also to maintaining the Company at a globally competitive level of procurement.

Process optimization program in procurement

The process optimization program in procurement is an important component of the “Volkswagen Way” and is helping us achieve the objectives of the Group Strategy 2018. In the course of this program, all key procurement processes will be analyzed and optimized where necessary. Last year, over 100 procurement employees attending numerous workshops identified necessary process improvements on the basis of their long-standing experience. The feasibility of the measures derived from these was then verified, the measures were evaluated and a decision was made about their adoption. For example, the number of documents for the forward and global sourcing processes was reduced to those needed for contracting and clear responsibilities were defined for their preparation. To ensure that the measures adopted are employed on a long-term basis, we put together an electronic manual containing binding information and clear descriptions of all processes. All procurement staff were then exhaustively briefed on the process improvements at training events in the Procurement Academy. At the end of 2010, we started to transfer the successful program to all brands and regions.

Sustainability in supplier relationships

Integrating the Group’s vision of sustainability into its supplier relationships is an important task at all levels of the Procurement division and one in which we apply the environmental and social standards enshrined in our corporate policy to supplier management. Back in 2006, we teamed up with external scientific experts to develop a concept for assuming environmental, economic and social responsibility together with our business partners. Since 2008, this concept has been expanded to all brands and all regions in which the Company is active and its effectiveness is continuously reviewed and assessed. The four main pillars of the concept are sustainability standards for suppliers, an early-warning system to minimize risk, transparency in the procurement process, and supply monitoring and development.

The training of new procurement staff focuses on sensitizing them to shortcomings and potential for improvement at suppliers. The work of the international “sustainability procurement network” is helping to implement this concept globally throughout the Group – despite variations attributable to cultural requirements. In 2010, a second series of events was organized in India following the success of the supplier training project in the previous year. Other training projects were implemented in Brazil, Argentina and at Volkswagen de México.

Purchasing volume

In 2010, the Volkswagen Group’s purchasing volume – including the Chinese joint venture companies – increased by 26.8% year-on-year to €89.7 billion. The proportion attributable to German suppliers was 39.0% (41.9%).

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PURCHASING VOLUME BY BRAND AND MARKET

 

 

€ billion

 

2010

 

2009

 

%

Volkswagen Passenger Cars

 

58.4

 

45.0

 

+29.8

Audi (incl. Lamborghini)

 

17.0

 

14.3

 

+18.4

Škoda

 

5.1

 

4.2

 

+21.6

SEAT

 

2.9

 

2.7

 

+8.0

Bentley

 

0.3

 

0.2

 

+36.8

Volkswagen Commercial Vehicles

 

1.9

 

1.5

 

+26.4

Scania

 

4.1

 

2.8

 

+50.6

Volkswagen Group

 

89.7

 

70.7

 

+26.8

Europe/Remaining markets

 

59.2

 

49.4

 

+19.8

North America

 

4.2

 

3.2

 

+30.0

South America

 

7.8

 

5.4

 

+44.2

Asia-Pacific

 

18.5

 

12.7

 

+46.0

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