Volkswagen's purchasing priorities have changed over the past few years, driven by its strategy to launch a wider range of models with greater engine and gearbox combinations, brought to market more quickly. Pischetsrieder has assigned purchasing a key role in improving group performance. SupplierBusiness.com reports.

Key to the change is what Volkswagen describes as its Baustein or building block principle, which prescribes cross-platform commonality of modules or systems. Currently it is confined to parts such as screws but it will become a reality with the introduction of the Golf and Passat at Mosel in Q1 2005. High commonality of chassis parts with significant common components such as the electronic architecture offer major opportunities for reducing production complexity. 75% commonality in infotainment is not inconceivable for example. "Intelligent product flexibility enables things to be developed as flexibly as possible". said Deeter Seeman, Head of Purchasing Responsible for New Product Launch.

On the issue of improved production start-up Volkswagen is looking for a systematic and continuing reflection of the readiness of the product. Volkswagen calls its measure 'Reifengradspiegel'. It has also introduced a series of supplier workshops for the new Golf, which has improved communication, as our supplier satisfaction survey (opposite) confirms. While most OEMs are partnering more closely with suppliers to enable them to bring new models and technologies to market more quickly, Volkswagen is not keen to rely too heavily on outside companies completely and maintains a large number of operations, which compete with suppliers.

Head of VW Group purchasing Francisco J. Garcia Sanz has said he is focusing on "longterm relationships". Cockpits and seats are often produced in-house, for example. Suppliers have complained that Volkswagen has not given work, or has asked suppliers to quote on programs and then awarded them to in-house operations after having looked at the best idea that the supplier can offer. Volkswagen executives have acknowledged that the process has not always gone smoothly in the past. One reason is that few suppliers really know all the technologies involved in more complex modules such as cockpits or front ends. As a result suppliers are not able to manage all the sub-systems and offer benefits from integrating them, according to one Volkswagen purchasing executive.

One problem with working closely with suppliers may come from Volkswagen's own international organisation. "VW seems to operate in "towers". They do not communicate with each other (purchasing to engineering eg) as well as they should. They need to become more dynamic," said one respondent to our supplier satisfaction survey.

Quality has become more important to the Volkswagen brand as it has tried to reposition itself as a premium mass brand. The introduction of the Phaeton and Touareg has raised the game internally within Volkswagen and this will filter down into next generation models, said one Volkswagen development executive.

The importance of e-procurement should not be underestimated at Volkswagen. Volkswagen has developed its own supplier platform, side-stepping common platforms such as Covisint. The system is being installed by a team which includes IBM and AT Kearney.

Volkswagen will only use e-business tools where they provide visible value immediately. Ebusiness was "over-played", said one executive, "but Volkswagen is making all its orders to its supply base e-supported". Normal electronic supplier links will build up to develop the capacity management.

This is an area that was highlighted in our survey as being weak. "The poor quality and reliability of the logistic data from VW is an ongoing concern, it requires a lot of work from the supplier in order to estimate what will be the real VW activity. These efforts could be used for more productive tasks that could be of a benefit to VW," said one supplier.

Demands for higher quality at lower cost
This is the first of a regular series of supplier satisfaction surveys carried out by SupplierBusiness. To participate in these surveys, which will focus on a different OEM each month, please contact Alex Graham at info@supplierbusiness.com. Next month's survey will focus on Renault-Nissan.

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Index calculation methodology
39 Volkswagen suppliers responded in full to our survey. The full question and answer responses are available on our website. The table above is a statistical analysis of the responses. The responses in each category (decreased, stayed the same or increased) are given a value (1,2 or 3) respectively. The total is divided by the number of respondents. In each case, 2 would mean "no change in the last two years" so we subtracted 2 from each calculated response, to provide negative values for responses where the overall result was decreased, and positive values for increases.

More segments mean more models
More models in more niche segments, with high degrees of brand differentiation, is what Volkswagen is aiming for.

The charts below shows just how differently Volkswagen executives view their market today, compared to less than 20 years ago. In 1985 the Group had cars in just 9 segments. In 2001 it had cars in 33 segments, and by 2005 it is expecting to cover 40 segments.

The introduction of the Baustein strategy is not the complete end of the platform strategy, but it does mean there will be more platform codes, as platforms are varied for different models. For example the Passat and A4 will now be on slightly different platforms. The A4 will be on PL46 (L for longitudinally mounted engine) and the Passat PQ46 (Q for quer or transverse mounted).

Still the largest platform by far is the Golf platform. The new PQ35 will have 14 models on it, compared with seven on its predecessor, PQ34.

Around 3m cars a year will be built off PQ35 eventually, compared with 1.5m on the smaller Polo platform (PQ24).

PQ24 will also see an increase in new models, although the poor selling Lupo and Arosa city cars are unlikely to be replaced. A low-spec model, called Tupi, is being built in Brazil and is being reengineered for export to Europe starting from 2005.

Key to brand differentiation will be moving the Volkswagen brand up-market, clearly away from Seat (sporty) and Skoda. Volkswagen has already introduced a luxury car to its line-up - the Phaeton, but to really achieve this up-market brand perception it needs a car between the Passat and the Phaeton. Global Insight's Philipp Rosengarten is expecting this to go into production as early as 2005, just six months after the Passat itself.

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Volkswagen maintains high level of in-house production
Volkswagen has one of the most extensive sets of component operations of any large car manufacturer in-house, as well as a high level of vertical integration in many of its core plants. These include gearbox and exhaust system manufacture at Kassel, engine, axle, steering and suspension production at Braunschweig and the group's joint venture wiring systems business, Volkswagen Bordnetze.

The Wolfsburg plant where the Touran is assembled has around a 45% level of vertical integration, and assembles modules such as doors, cockpits and front ends in-house. These are commonly outsourced at other carmakers and in fact at other Volkswagen plants. For example, ArvinMeritor assembles the complete interior door module for Golf production in Brussels, but only delivers its components into Wolfsburg for the same vehicle.

For vehicles based on the PQ35 such as Volkswagen Golf V, 2003 Audi A3 and Volkswagen Touran, standard power steering systems come from Braunschweig, which manufactures around 1m steering systems every year. But Volkswagen still uses German supplier ZF Lenksysteme for high-end electrical power steering (EPS) systems as an option.

The rear axle was redesigned for the new platform at Braunschweig, where around 3.1m complete rear axles are assembled annually. Braunschweig is one of the largest axle producers in the world and has annual turnover of around €2bn. The 6,600 employees at Braunschweig also produce some 7m shock absorber sets every year.

Kassel manufactures the major part of the exhaust system for PQ35 vehicles. Tenneco Automotive's rear exhaust system is delivered into Kassel where entire exhaust systems are then assembled. Gearboxes are also assembled here, and the components for BorgWarner's advanced Dualtronic (which Volkswagen markets as Direct Shift Gearbox DSG) double clutch transmission are delivered to Kassel for in-house system assembly.

Volkswagen Bordnetze (VW BN), established in 1986 as a joint-venture with Siemens, provides in-house wiring systems capability. Bordnetze typically assembles semi-finished systems in lowercost countries and completes assembly at its plant near Wolfsburg. The wiring harness system for the Golf V comprises around 800 cables, totalling one km in length. Lead time for one unit is around 8 hours. The operation had 2002 turnover of around €450m.

The Volkswagen Group's installed capacity means that it will continue to carry out many operations in-house. Indeed, in December 2002, Volkswagen announced plans to invest around €780m in its Braunschweig operation over the next four years. The investment will focus on R&D particularly for shock absorbers and electric power steering development.

As former CEO Ferdinand Piech was keen to argue, the company has some of the best scale economies in the business. It is one of the largest producers of steering systems and the Group has considerable sunk capital and in-house skills in many of these areas. Furthermore the ownership structure of the Volkswagen group suggests it is set to maintain its in-house approach. Worker representatives make up 50% of Volkswagen's supervisory board, which has responsibility for monitoring and controlling the management board, and the state of Lower Saxony holds 20% of Volkswagen's shares.

Volkswagen is also the European carmaker where the metal workers' union IG Metall has the most influence and current CEO Berndt Pichetsrieder has shown no desire to challenge the influence of the union. In the supplier community, this is widely held to be the decisive factor in VW's sourcing strategy.

However, this outlook may change as the IG Metall strikes of June 2003 in the states of the former East Germany hit VW hard, resulting in lost production of around 22,000 vehicles. Morgan Stanley estimates this will have cost Volkswagen around €100m in pre-tax profit. Under increasing pressure, the union called off the strikes and descended into a bitter internal row, which saw the exit of then-boss Klaus Zwickel, and the installation of a new two-man team. Commentators say the
union is at a crucial crossroads, and must decide between its hard-line tradition and reform.