The main tasks for procurement in fiscal year 2016 were to cover the Company’s needs and safeguard its vehicle start-ups as well as to help ensure the competitiveness of its products. Beyond that, procurement calculated opportunities in new markets and shaped the Company’s future partnerships with its suppliers through the Volkswagen FAST (Future Automotive Supply Tracks) initiative.
Procurement policy and strategy
The vision of Volkswagen Group procurement finds expression in the phrase: Together – best in customer value and cost. Procurement makes a key contribution to innovation and cost optimization by playing an active part in early project phases, through its price leadership with new technologies and through marketable concepts. Our mission is to have the world’s highest performing and most attractive procurement organization.
At the time the new Group strategy was being developed, the strategy of Volkswagen Group procurement was refined accordingly. Key elements concern digitalization, future-proof process and organizational structures, and the ever-changing supplier base. Sustainability plays an even more important role in the new strategy.
As the digital transformation gathers pace in the years ahead, we expect to see a sharp increase in procurement volumes of digital products and services. Examples of these are the components for autonomously driving vehicles, software and also services, especially in the area of new mobility. In this context, it is important to review and refine the decision-making parameters and methods we employ so that we can ensure that we achieve optimum prices, quality and data security in the digital world as well. Procurement will also harness the digital transformation to continue to optimize its own processes and structures, e.g. through the deployment of artificial intelligence or Big Data.
In the coming years, digitalization will further change the way we collaborate with our suppliers. When it comes to our traditional suppliers, we expect to see a sustained concentration of those companies that deliver directly to us. Suppliers that deliver upstream components such as processors or software will continue to gain in importance, and the number of suppliers from Asia, particularly China, will rise substantially.
Volkswagen Group procurement’s Strategy 2025, which has been developed further within this framework in consultation with the brands, has six target dimensions:
- Access to supplier innovations
- Active cost structures
- Forward-looking structures
- People, expertise and attractiveness
- Supply chain excellence
- Group-wide synergies
The content of each of these target dimensions is described concisely, and specific KPIs have been assigned to the targets. The first initiatives were already successfully launched at the end of 2016.
Volkswagen FAST – progress and milestones
FAST is the central initiative of Group procurement, introduced in 2015 with the aim of making the Volkswagen Group and its supply network future-proof. The goal of FAST is to successfully implement the key topics of innovation and globalization by involving suppliers at an earlier stage and more intensively. The FAST initiative enhances the quality and speed of collaboration with our key partners, and thus enables us to coordinate global strategies and points of technological focus even more closely. The common goal is to make impressive technologies available to our customers even more quickly and to implement worldwide vehicle projects more effectively and efficiently.
Key milestones were reached in 2016. We held strategic dialogs with 55 suppliers for 61 competencies and agreed on joint targets. At our first strategy conference, these selected suppliers talked with members of the Board of Management and other representatives of the Volkswagen Group and its brands about the key topics and projects of the coming years. After its successful launch, the FAST initiative will now be expanded to include suppliers for other product groups, e.g. components for vehicle connectivity. We carried out an initial review of these strategic partnerships in 2016 and will continuously adapt the group of FAST suppliers where necessary. This means that suppliers who have not yet been selected still have an opportunity to qualify for the initiative.
We are continually adapting our methods for involving suppliers in the innovation process so that our customers get to experience impressive technologies even more quickly. One example is the Innovation Days introduced within the scope of FAST. We created this multi-step process to identify and assess our suppliers’ innovative ideas at an early stage and integrate them in the Company’s technology planning. We made good use of the very first Innovation Days in 2015 to discuss and design innovations for compact-class vehicles together with our suppliers. In 2016, we took this concept to the next level, identifying with our suppliers innovations for a new generation of electric vehicles on the basis of the Modular Electric Toolkit (MEB). By inviting our suppliers to take part in competitions for new concepts, we are systematically supporting the cost-effective implementation of new technologies. We discuss and flesh out promising topics with our suppliers in our “Innovation Forum”.
Procurement has responded to the impact of new technologies, adapting the issues it addresses and its organization accordingly. For example, for the first time, we have defined fixed contact persons within procurement who support their designated suppliers at every step in the innovation process. Close collaboration has been established with the e-mobility unit and additional competencies have been established in new product groups for electric drives, autonomous driving, new display and operating concepts as well as vehicle connectivity.
Procurement processes and procedures
Standardized procurement processes and systems that apply across the Group are the basis of all of our activities in procurement. We were able to build on this sound basis in the reporting period, continuing to work hand in hand with our suppliers to refine our systems, with the aim of creating a worldwide digital network of all of the procurement work processes. We also continued to enhance our variant-management processes: we want to help achieve cost-optimized product design and firmly anchor the idea of economic efficiency in our vehicle projects. In the reporting period, we largely completed our revision of the product development process, especially of the early phase, with the result that concept development and feasibility studies are to proceed in parallel in future.
Digitalization of supply
We are striving to develop an entirely digital supply chain, and our partners have a crucial role to play in this. In 2016, our process optimization program, supplier interaction management, provided us with additional supplier feedback across all brands and regions of the Volkswagen Group on the potential for efficiency gains and digitalization. Subsequently, we used that feedback to come up with ideas and approaches for further optimize and digitalize the points of contact in our collaboration, for example by deploying artificial intelligence when dealing with bottlenecks in the supply of purchase parts and raw materials. The Group Business Platform constituted an important milestone in 2016 with regards to optimizing and digitalizing our collaboration with our suppliers. Thanks to the latest technical developments, the Volkswagen Group will be in a position going forward to make fast, cost-effective use of the most innovative technological trends offered by mobile and internet-based collaboration. By bringing together internal and external partners on a digital platform, we are making it possible for all those involved to communicate with each other in real time.
Supply situation for purchase parts and upstream materials
The systematic tracking of purchase parts so as to avoid bottlenecks continued to gain importance in 2016. Natural disasters such as earthquakes and floods impacted the availability of upstream materials, which Group demand management countered with comprehensive measures. In the reporting period, we were also able to avoid any large-scale stoppages in vehicle production apart from a few exceptions.
Management of purchase parts and suppliers
At the Volkswagen Group, purchase parts management comprises the technical unit within procurement that is responsible for ensuring the availability of purchase parts by means of an international network of tool and industrialization experts. Purchase parts management involves two aspects: preventive action before the start of series production in new vehicle and engine projects through the inspection of selected purchase parts volumes for the toolmaking process; and a reactive support when problems arise in the supply of purchase parts during series production. Purchase parts management’s international network enables its experts to draw on the knowledge and experience of colleagues at various locations during global projects, thus enhancing the efficiency of start-ups. The purchase parts management experts work in close cooperation with their quality assurance colleagues across all divisions in the plants and carry out performance tests of suppliers at the individual milestones in the product development process in order to ensure that the required supplier capacities are available in the right quality for vehicle start-ups.
Sustainability in supplier relationships
As far as sustainability in supplier relationships is concerned, our activities in 2016 focused on exercising and implementing our corporate due diligence at all points in our supply chains.
In this context, we expanded Volkswagen Group's requirements for sustainability in relations with business partners (Code of Conduct for Business Partners) in 2016 to include a passage regarding our duty to promote responsible supply chains for minerals from countries beset by conflict or classified as high-risk. We also made corresponding revisions to the Volkswagen Guideline on Raw Materials from Conflict Regions. Our suppliers were informed of these changes through appropriate forms of communication.
In the reporting period, we continued to enhance the knowledge of both our own staff, and also our suppliers' staff, as regards sustainability in supplier relationships – both online and face-to-face. As of the end of the reporting period, 25,000 supplier locations had completed our online training program. In addition, more than 900 employees from procurement and around 1,300 employees from more than 800 suppliers completed face-to-face training sessions in fiscal year 2016. The face-to-face training sessions for suppliers generally took place in cooperation with other automotive manufacturers and targeted suppliers in the Czech Republic, China and South Africa, as well as suppliers from the logistics industry.
In line with our established sustainability concept and processes, a total of 45 suppliers were audited by an external service provider in fiscal year 2016. In 19 of these cases, the audit findings prompted us to perform an immediate structured process for in-depth analysis. As a result, we agreed upon action plans with the suppliers in question with a view to improving their sustainability performance.
Around the world, we take care to enforce minimum sustainability standards especially with regard to human rights, occupational health and safety, environmental protection and the fight against corruption. In addition to that, we track the sustainability performance of our suppliers. The longstanding business relationships that result from this are beneficial to all the parties involved, namely the Group and its suppliers. We ensure the consistent quality of the goods and services provided and avoid disruptions to supplies and reputational risks.
Structure of key procurement markets
Through the procurement units in our markets and eight regional offices across the globe, we assist local suppliers close to our production plants in meeting our high quality requirements. Suppliers who meet our requirements also have an opportunity to move beyond their local markets and deliver their products to other Group locations around the world. In key regions, quality assurance, technical development and logistics provide support in this task, and are organized in procurement-led project teams. This approach is crucial in safeguarding the Company’s global supplies and keeping purchasing prices at competitive levels. One example of the development of new procurement markets is the regional office opened in Bangkok in the reporting period. The objective of the new office is to continue expanding our supplier portfolio in the region and to increase the flow of goods from the ASEAN countries.
Procurement is present not only in new growth markets, but also in well-known and established ones such as Japan, South Korea and Israel. In this way, the department ensures that the Company has access at all times to the latest innovations and technologies of tomorrow.
Purchasing volume of Volkswagen Group procurement
Procurement purchases production materials, services and capex items. In 2016, the incoming goods and order volume amounted to €166.5 billion, including the figures for the Chinese joint ventures.