Design Cost - US Auto Industry Business Model

US Automotive IndustryDtC Programs for Automotive OEMs and Tiers 1&2

May 2009

Approach proposed & Business Model

Contents

1

Business cases

Perspective on cost reduction in the Automotive sector

Next steps proposed

1

… 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 automotiveproduct cost optimization and global sourcing there are major differences in approach between the US and best-in-class actors

2

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

BMWPorsche

Toyota & Honda

Pressure vs.

innovation

Best-in-class OEMs leverage product design optimization rather than competitive pressure

3

ChryslerRenault-Nissan

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?”

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onda

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lvo

PSA

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EVW

Ford

GM

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diH

onda

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GM

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ault

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san

Audi

Skod

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onda

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rd Fiat VW SE

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Ren

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da

Audi To

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rd GM

ESE

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Fiat G

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Source: Regenius

Toyota is still the benchmark, with an institutionalized supplier development approach delivering outstanding results

4

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

Results achieved after optimizing product conception and specifications are promising

Savings PercentPower 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

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

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 f requency– 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– Prof it f rom 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

dif ferent categories

Panorama of the 8 strategic levers of purchasing optimization

8

Breakdown of Realized Material Cost Savings by Type of Action Percent

3%2%

2%3%

42% 33%

15%

Supplier change

RenegotiationModularization

Volume bundling

Design changes

Specification changesStandardization

40% Purchasing-driven 60% 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

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

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

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 partsSavings 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 componentsSavings 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 componentsSavings 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 1Scope: € 650 M of parts and componentsSavings 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

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

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Contents

14

Business cases


Next steps proposed

14

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 4On-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

A 5-Step Diagnostic Identifies Savings Potential, & Mobilizes the Organization

Act

iviti

esD

eliv

erab

les

Savings analysis and prioritization

Data and spend analysis

Opportunities assessment

Diagnostic

Castings

Piping

Elec. cabinets

Impact for A.T.

High

Low

Supplier market complexity

Low

High

• 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

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)

DiagnosticIterative savings

potentials evaluation

Data collection part-level completed by Material group

Creative ideas

Feedback to suppliers (target prices)

Revised offers fromsuppliers Status saving potential

Confirmed recommendationsValidated 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

Implementationroadmap

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Technical information

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

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Contents

19

Business cases


Next steps proposed

19

Peel-and-stick heat elements

Sewn-in heat elements

Suspension boot

Seat belt

Lumbar support

BaseMechanical suspension

Seat, frame, backrest

Seat tilt

Arm-rest

29% costreduction

Seat heating

The starting point of the approach is to tear down a product into functional groups – Automotive seat example

20

Material

Bearing type

Weight (g)

• Forged steel

• 2ndGeneration

• 8,058

• Cast Iron

• 1stGeneration

• 8,379

• Cast Iron

• 1stGeneration

• 7,330

• Cast Iron

• 1stGeneration

• 8,386

• Cast Iron

• 1stGeneration

• 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

Comparing product concepts is very powerfull: Overview of disassembled door panels

Supplier 1 (Product concept 1)




22

Headlights: Analysis of existing concepts and ideas for improvement

VW Passat

Audi A4

Concept differences in existing modelsLevers 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

Estimatedtotal financial impact

EUR 20 million

Concept of reflector configuration

Overall headlight concept with different number of parts

Connectors and joint designGeometry of outer housing

Major differences

23

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 valveQualitative assessment

Same functionality with 4 programs (fast, slow, soft, hard)

Smaller range of tolerance possibleLower quality costs

-24%

After optimi-zation

Before

24

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

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

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

Product Benchmarking – Case study example: Car Bumpers

Car BIn 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 AIn 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 BGRP part

Car APU foam on complex die-cast frame

CostsCar A

CostsCar B

-84%Die-cast frame PU foam

CarbodyShock absorbers

Car body

GRP bumper

28

Detailed Value Analysis of even “optimized” products can bring surprising results

STEERING COLUMNSAssemblies Functions Ideas (examples)

• Standardized forkAttach 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 savings16% 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 areoptimized, there is no more fat to trim"– Chief engineer

...

...

...

...

Steering column

29

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

Productioncost

Raw Material cost

5

45

50

SG&A

Productioncost

Raw Material cost

Intake manifold redesign – Parts view

31

Final designInitial state

DtC basic concept:systematic iterativeanalysis of improve-ment opportunities • Eliminating/Inte-

grating parts • Improve parts

manufacturability• Maximize ease of

assembly

Examplefor "optimization

of product forassembly"


Contents

32

Business cases


Next steps proposed

32

A typical DtC project in the automotive industry over 9 - 10 months

• Demonstrate potentialsuccess of DtC in 3 - 4pilot vehicle modules,e.g., cockpit, interior,front module, seats

• Unleash full DtCpotential: rolloutacross all modulesof a vehicle

• Transfer and institu-tionalize DtC to gaina lasting competitiveadvantage acrossbrands, vehicle, andvehicle segments

Mid-range

Com-pact

…

Alfa Fiat …

Brands

Ve-hicle/Seg-ments

… …

… …

…

156 Stilo …

Punto

Pilot: 6 - 8 months 12 months Ongoing

3333

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