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Machinery and industrial equipment manufacturers arestepping up their M&A activities again. But M&A remainsdifficult terrain, with 50 percent of all transactions falling shortof the mark. A recent study conducted by Oliver Wymanhighlights success factors and pitfalls.

Cover story on mergers & acquisitions in the manufacturing industry, page 6

3

editOriAl

Many machinery and industrial equipment manufacturers have been growing successfully the past number of years and have been able to stock up their cash reserves. despite this, Western companies have been hesitant to engage in mergers & acquisitions – unlike Chinese manufacturers. But M&A can be an important tool in the game of growth and consolidation, if manufacturers consider certain decisive success factors, as our lead article emphasizes. However, there are more things to consider to stand one’s ground on the global stage. Manufacturing companies must apply the principles of globalization across the entire value chain, from purchasing through operations to sales. Several articles in this issue discuss dealing with this challenge.

increasing interconnectedness will lead to yet another success factor for the future: industry 4.0. the interviewee in this issue, Prof. dr.-ing. Udo Ungeheuer, president of the Vdi, the Association of German engineers, elaborates on this phenomenon and on opinions within the business regarding this development.

Of course, business success will continue to rely strongly on pulling the most important operational levers. thus, improvements in areas such as spare parts pricing, or through a tailored product cost down approach, can have a significant bottom-line impact and help fill competitors with awe.

i wish you a thought-provoking read.

Best regards,

thomas Kautzsch

dear reader,

tHOMAS K AUtzSCH

Head of Oliver Wyman’s

Automotive and

Manufacturing

industries Practice

COntent

Cover story

Mergers & Acquisitions

PrACtiCe MAkes PerfeCt 6

globAl PersPeCtives

risk Management

it’s tiMe for A broAder APProACh to resilienCe 10

Purchasing

“glo-CAliZing” soUrCing And sUPPly 13

Production

internAtionAliZing the footPrint 16

sales

enhAnCing the worldwide sAles systeM 18

Corporate organization

orgAniZAtions MAde to go globAl 20

The articles in the “Global Perspectives“ section listed above are condensed from more in-depth perspectives published as part of the “Globalization in Manufacturing Industries” series, available online at www.oliverwyman.com/insights/industrial-products.html

externAl PersPeCtive

interview with Prof. dr.-ing. Udo Ungeheuer, President of the vdi

“inforMAtion teChnology seCUrity will MAke or breAk indUstry 4.0“ 23

oPerAtions

it transformation

ModerniZing it Pl AtforMs sUCCessfUlly 26

rapid ebitdA improvement

AdoPting PrivAte eqUity’s Pl Aybook 28

Price Management

innovAtive sPAre PArts PriCing 30

Cost reduction

tAilored ProdUCt Cost down for indUstriAl ProdUCts And eqUiPMent 32

PUbliCAtions

reCent oliver wyMAn PUbliCAtions 35

6

68%of leading machinery and industrial equipment manufacturers surveyed believe a German company in their segment will be acquired by an emerging market player in the next five years.

Machinery and industrial equipment manufacturers are stepping up their M&A activities again. but M&A remains difficult terrain, with 50 percent of all transactions falling short of the mark. A recent study conducted by oliver wyman found two critical success factors: first, companies growing through acquisition should acquire regularly. second, they should plan for failure avoidance by developing post- merger integration strategies early in the M&A process.

in recent years, German machinery and industrial equipment manufacturers have not been all that active in acquiring or selling companies. instead, they have been focused on increasing their financial reserves and organic growth. in the wake of the financial crisis, the annual number of transactions slumped, and it is still at less than 50 percent of the pre-crisis level. Almost one-third of the listed machinery and industrial equipment manufacturers in Germany, Austria, and Switzerland have made no acquisitions at all in the past five years. those that have engaged in M&A generally bought smaller companies that rounded off their product and service offerings.

new MoMentUMthe M&A wheel appears to be turning again, however. the acquisitions of trumpf and Claas in China, the purchase of Homag by dürr, and of Metco by Oerlikon, are a few such examples. Some companies are also using the current phase of high company valuations to strategically adjust their port-folios. the most recent high-profile transactions include GeA’s sale of its heat exchanger division, and trumpf’s hive-off of its medical technology activities.

A wide range of studies have indicated that 50 percent of all acquisitions fail, in the sense that they don’t achieve their envisaged goals. nevertheless, statistics show that M&A transactions do positively impact combined share-holder value. numerous studies also reveal that companies with extensive M&A activities are more successful than those that hold back. A recent analysis by Oliver Wyman of listed machinery and industrial equipment manufacturers in Germany, Austria, and Switzerland found that companies that either make frequent acquisitions or no acquisitions at all have about the same total shareholder return. But, manufacturers with a low level of M&A activities are less successful than either of these groups. this seems

Mergers & ACqUisitions

PrACtiCe MAKeS PerfeCt

7

Average annual total shareholder return by number of acquisitions from 2009 to 2013 40 listed machinery and industrial equip-ment manufacturers in Germany, Austria, and Switzerland, in percent

Source: thomson One, Oliver Wyman analysis

Non-acquiring

companies

Occasional buyers

(1-3 acqui-sitions)

Regular buyers

(>3 acqui-sitions)

31,8

24,3

32,3

30 50 20Distribution of companies in sample

to indicate that if companies choose to play the M&A game, they need to do so regularly to master it.

good reAsons for ACqUisitionsfrom a financial point of view, conditions in the industry are highly favorable for M&A activity. equity ratio has reached a historic high, the level of debt is lower than ever before, and interest on borrowed capital has dropped to a record low.

there are opportunities for machinery and industrial equipment manufactur-ers to make acquisitions with high value growth potential, such as companies that are in distress, badly managed, or have an unclear succession. in the past, primarily SMe holdings or financial investors took the plunge with such companies, but large, established organizations can also use such opportunities to increase their value. the rank Group, for example, almost doubled its shareholder value after acquiring SiG in 2007.

Acquisitions can make strategic sense in many ways. Over the near term, we believe that acquisition activities in this industry will be motivated by the following:

• Mid-market positioning: Acquisition of companies that serve the mid-market segment. the goal here will be to obtain access to or enhance a company’s position in this growth environment, particularly in emerging markets.

• Convergence: Customers are demanding more holistic product and service offerings, as well as the overarching optimization of their production systems. As a result, it is essential that manufacturers acquire companies that can supplement and round off their product and service offerings. in the future, we believe that they will primarily focus on acquiring it and innovative service business models, in addition to supplementary product portfolios.

• Diversification: An increasing number of machinery and industrial equipment industries are consolidated at the global level. if they want to achieve long-term, above-average growth, leading manufacturers in these segments will need to diversify.

Oliver Wyman’s survey of leading machinery and industrial equipment manufacturers found that diversification was considered to be of prime importance. it was the motive for acquisition mentioned most frequently – despite the prevailing belief that, as a rule, acquisitions close to the core business contribute more value than diversification.

eMerging MArkets – bUy or be boUght?in the past, globalization and the growing importance of emerging markets such as China have had a one-sided effect on M&A activities. Whereas the number of acquisitions by european companies in Asia has remained more or less unchanged in recent years, acquisitions by Asian companies in

8

Motives for M&A in the machinery and industrial equipment industry in percent

Source: Oliver Wyman‘s survey of leading machinery and industrial equipment manufacturers in Germany, Austria, and Switzerland

0 5 10 15 20 25 30

Importance of motive(allocation of 100 percent to possible reasons)

Ch

ang

es re

lati

ve to

the

pas

t

Less

im

por

tant

Iden

tica

lM

ore

imp

orta

ntFinancial

goals

Cost efficency improvement

Resource goals

Global footprint

Revenue growth through diversification

Revenue growth in the core business

europe increased by more than 700 percent. the absolute number of trans actions is also rising: in the past three years, Asian firms have purchased 50 percent more frequently in europe than the other way round.

the manufacturers surveyed by Oliver Wyman expect that this trend will persist. Some 68 percent of survey respondents believe that, in the next five years, it is likely that a German company in their segment will be taken over by an emerging market player. they generally assume that, in the future, more emerging market players will make acquisitions in industrial nations than vice-versa.

Corporate acquisitions in China pose a particular challenge, and carry specific risks. Critical aspects are transparency into the employee structure and the motivation of local executives, as well as into political affiliations and their history. during the integration phase, it is important to focus on the local executive team and not on placing expats in key positions. it is much easier for companies with a strong local footprint in China to success-fully acquire and integrate local companies.

Pl Anning for fAilUre AvoidAnCethe companies that participated in Oliver Wyman’s survey firmly believe that if corporate acquisitions fail to live up to expectations, this can be attributed either to an unsuitable M&A strategy or inadequate attention to post-merger integration (PMi). they consider the selection of targets, due diligence, and the negotiation and definition of both transaction structure and price as less prone to errors. However, there are also important formulae for ensuring the success of these process steps, including staying away from M&A processes involving broad auctions, assessing core competence- related topics such as technology in-house during the due diligence phase, and handing over other

9

thomas.kautzsch@oliverwyman.com+49 89 939 49 460wolfgang.krenz@oliverwyman.com+49 89 939 49 403

Pitfalls during the acquisition process distribution of mistakes ranked as #1, in percent

Source: Oliver Wyman‘s survey of leading machinery and industrial equipment manufacturers in Germany, Austria, and Switzerland

Definition of the M&A strategy

Selection of target

Due diligence process

Negotiation of deal structure and price

Post-merger integration

42

0

11

5

42

Acquisition process

aspects to specialists. in addition, assessing executives and the corporate culture aren’t marginal topics; they are at the core of a thorough due diligence process.

the most common pitfalls during PMi are an insufficiently prepared inte gration process (“pre-closing”), inadequate cultural integration, and underrating the complexity of the integration process. What’s more, in many cases the PMi process is not aligned rigorously enough with trans action goals. On the one hand, this can lead to an exponential increase in both required time and costs. On the other, it increases the potential for issues important to achieving transaction goals to be neglected and fall by the wayside. Consequently, it is crucial to start PMi preparations well ahead of the closing. At the same time, it is essential to involve the trans action team in PMi and to be willing to draw on the experience of in-house or external specialists as needed.

it is obvious that the wrong M&A strategy can easily spell doom. Yet this insight seems to be ignored on a regular basis. Companies generally can’t go wrong if they stay within the scope of the existing business design, although they may overrate cost and cross-selling synergies. A transforma-tional acquisition that aims at establishing a new business design, however, needs to be handled with care. this includes performing a comprehensive but accurate review of the industrial logic à priori and assessing the actual value added likely to result from the transaction – particularly from a market and customer perspective. it can also be valuable to set up a “challenge team,” charged with identifying any weaknesses in the strategic concept prior to entering into the acquisition process.

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it’S tiMe fOr A BrOAder APPrOACH tO reSilienCe

Manufacturers have plenty to contend with by way of core business risks such as technological change, rising costs, product failure, and demand uncertainty. but it is also vital that they show vigilance and agility in the face of “global risks” that have the potential to disrupt performance and market positioning. Companies that fail to build resilience and anticipate opportunities may find themselves vulnerable to sudden shocks and slow-moving catastrophes.

Global risks present complex uncertainties that reach far across countries, business sectors, and communities. interconnections between globalization, technological advances, climate change, demographic shifts, and movements in national economic power are making these risks ever more important for manufacturers – irrespective of their geographic footprint. With a ten-year outlook, the World economic forum’s Global risks 2014 report is mindful of the economic risks that are the ongoing fallout from the financial crisis – fiscal weaknesses, unemployment, and the residual threat of a collapse of a major financial mechanism or institution. But the report expresses equal concern about environmental, societal, geopolitical, and technological challenges that will inform the business environment of the future.

threAts on MAny frontsin the past five years, the global economic cost of large natural catastrophes and man-made disasters has amounted to approximately $1 trillion in total. While much of the damage is local, impacts can often be felt much further afield. it is well known that the tsunami of 2011 in Japan led to the suspension of operations in automotive plants and other industrial facilities on the other side of the globe, not just locally. furthermore, hard disk drive prices almost doubled globally and consumer electronics output fell.

But gradual environmental change and policy responses can also present challenges. Water shortages, for example, can cause commodity price spikes, disrupt production, or impede logistics. due to lower water levels in the Great lakes between the US and Canada, cargo ships carried eight percent less freight in 2013 than in 1997, raising transport costs. increased government efforts in europe to reduce the carbon footprint of their economies are affecting the long-term competitiveness of energy-intensive

risk MAnAgeMent

total economic losses from natural catastrophes and man-made disasters 2009-2013. Source: Swiss re financial report 2013.

$1tn

11

Ten global risks of highest concern in 2014

Source: World economic forum, Global risks 2014. Survey with 700 respondents asked for their views on 31 risks in total

manufacturers, especially petrochemicals, as green taxes and rising power prices take their toll.

But threats exist on many different fronts, with societal and political tensions coming to the fore over the past 18 months. Growing popular unrest in emer-ging markets that are struggling with major economic, political, and social reforms is giving rise to workforce disturbances. food and automotive manu-facturers were obliged to halt production in egypt in 2013, while persistent protests in Brazil, turkey, and South Africa have required high levels of corpo-rate preparedness. Stubbornly high youth unemployment (nearly 18 percent in advanced economies, 30 percent in the Middle east) may constrain the future talent pool needed to fill increasingly skilled manufacturing jobs.

Geopolitical strains are generating significant new uncertainties. On the one hand, states prioritizing national or populist concerns are jeopardizing the completion of several international trade agreements that promise to reduce tariffs and enhance regulatory coherence. On the other, tension between the leading east Asian economies, the deterioration of relations between russia and the West, and the resurgence of conflict in iraq all present significant challenges for manufacturers with local exposures. Although financial markets have not yet been too unnerved by the course of events, escalations could rapidly threaten operational safety, business performance, and strategic positioning. indeed, stronger sanctions against russia are affecting not only suppliers of defense technology and oilfield equipment, but also manufacturers in unrestricted sectors. And russia’s goal to be less reliant on high-end foreign suppliers in certain sectors by fostering domestic capabilities could have a longer-term impact.

finally, manufacturers’ growing reliance on internet-based functionality, allied with the increasing sophistication of cyber-attacks, has created new vulnerabilities for industrial control systems, intellectual property, and confidential company data. it is notably hard, for example, to deploy patches and updates in the field of production it, and requirements to safeguard production systems will increase significantly in the future, since nearly all such systems are expected to be connected via remote services over the coming decade. these and other factors make it harder for manufacturers to guard their intellectual property and protect their supply chain availability. from aviation to life sciences to high-tech, successful attacks could lead to process corruption, a failure to fulfill orders, the loss of competitive edge, and huge reputational damage.

the need for vigil AnCe And AgilityAgainst this backdrop, manufacturers of all types need to reconsider their resilience. Some global risks already feature in the risk registers of large companies. But often, the understanding of corporate vulnerability, and the magnitude of the exposure over different time horizons, is not well captured. Asking “what if?” questions and exploring both drivers and consequences through stress tests and scenarios is critical to developing appropriate mitigation that is aligned with corporate tolerances. it is equally important to understand how these risks are being addressed by core suppliers.

Rank Global risk

1 fiscal crises

2Unemployment and underemployment

3 Water crises

4 income disparity

5 Climate change

6 extreme weather events

7 Global governance failure

8 food crises

9failure of financial mechanism or institution

10 Political and social instability

12

identifying and reporting on leading indicators or weak signals is critical for galvanizing senior management and board-level attention, and stimulating timely action. in areas such as security, there is scope for non-competitive collaboration on intelligence between companies, and with governments – good models exist with respect to critical infrastructure. developing political capital at all levels is also essential for deepening corporate understanding of national policy decision drivers and the likelihood of unwelcome surprises.

When faced by sudden shocks, companies must be able to move smoothly into crisis management mode to protect themselves against direct losses and reputational damage. Simulations and other exercises provide a safe environment for testing not only the strength of corporate protocols, but also the quality of leadership decision-making as complex events unfold.

for some global risks, of course, there is also an upside. Whether this takes the form of supplier diversification, reduced water consumption in operations, or youth apprenticeship schemes, manufacturers that are strategically and operationally prepared for upcoming challenges will enjoy a competitive advantage. Moreover, the pressure on global leaders to address and resolve these issues can spur manufacturing innovations that range from medical devices to energy-efficient solutions, which will help boost the resilience of other economic sectors to these wide-ranging threats.

Note: Oliver Wyman, via its parent Marsh & McLennan Companies, is a strategic partner of the World Economic Forum Global Risks report and the OECD’s High-Level Risk Forum.

richard.smithbingham@oliverwyman.com +44 207 852 7828Alex.wittenberg@oliverwyman.com +1 646 364 8440

CHeCKliSt – KeY ACtiOnS fOr COMPAnieS

1. ensure business unit and corporate risk registers include specific event risks and trends to which the company is exposed

2. Analyze how those risks might affect investments, operations, and earnings, acknowledging correlated risks

3. Stress test planning assumptions against key downside events and scenarios, and implement mitigations where outcomes exceed tolerances

4. Monitor shifts in the global risk landscape and build into senior-level risk reports where appropriate

5. test and refresh crisis management and business continuity plans to accommodate possible global risk eventualities

6. Strengthen cross-industry and government interactions to enhance the power of collective action

7. Assess how changes in the global risk environment might provide opportunities for new products, services, and markets

13

PUrChAsing

“GlO-CAlizinG” SOUrCinG And SUPPlY

while demand for manufactured goods continues to increase globally, manufacturing companies’ value-add is still biased toward home markets. from a supply chain perspective, this mismatch creates inefficiencies: first, many companies still do not leverage the full potential of “best-cost country” sourcing. second, manufacturing firms that already have existing production sites in emerging markets are facing the challenge of “localizing the supply chain.”

Global demand for manufactured goods has shifted by 20 percent toward the BriC countries during the past decade. in the coming decade demand is expected to shift to broader emerging markets by a further 10 percent. nevertheless, the globalization of emerging market value chains still lags for many manufacturing companies. in 2012, for example, German com-panies exported more than 75 percent of their goods, but deployed less than 30 percent of their resources outside of europe. this mismatch is true not only for their own value-add in manufacturing, but also for supplied materials. recent Oliver Wyman research found that more than two-thirds

Comparison of manufacturing and logistics costs1 Comparative calculation for a cast iron part for German clients, in euros (2012)

Source: Bundesanzeiger, institut der deutschen Wirtschaft, economist 2013, eurostat, international energy Agency, exporthelp europa, Statistisches Bundesamt, Beschaffung aktuell, Oliver Wyman analysis 1 not including other costs (constant)

expected average purchased content as percent of total cost of high-end manufactured goods in 2025+.

> 70%

Germany Poland Bulgaria Russia India China

169

122 120130

141 147

Logistics costs

Energy costsLabor costs

Material costs

Duties

20

40

60

80

100

120

140

160

180

14

of German manufacturing companies’ purchased parts are still procured from european suppliers. this situation suggests there is room to improve their use of the global supply market. Best-cost country (BCC) sourcing and localization of the supplier footprint can help unlock this potential.

dynAMiC best-Cost CoUntry soUrCingBest practice for supplying production sites in home markets is to source using a best-cost country approach. Based on total cost of ownership (tCO) considerations, important parameters like supplier cost and quality, engi-neering and production, and supply risk profiles are compared.

traditional BCC-frameworks followed a static approach. today, such frameworks must be more dynamic, as manufacturing supply chain needs can shift rapidly in response to quicker product changes and shorter innovation cycles. in addition, production technologies have become increasingly flexible, and labor and energy cost advantages have diminished in low-cost countries.

there are plenty of examples of companies finding themselves in the middle of a product life cycle with an installed supplier footprint that was appropriate some years ago, but that is now a source of competitive disadvantage due to changes in the original business case. Modeling and simulation of potential dynamic changes in BCC frameworks often can lead to different decisions regarding the optimum supplier footprint. Cost-based optimization must be assessed from the perspective of contractual, sustainability, investment, and risk considerations before switching suppliers.

sUPPly ChAin loCAliZAtionA second key principle is localization. Maximizing local sourcing to support local production enhances competitiveness through reduced costs associated with labor, supplier management, inventory, and transportation cost, and speeds time-to-market.

of manufacturing companies do not use a standardized methodology to assess the best supplier footprint for their products.

Wholesale prices for gas in US-dollars per MMBtu

Source: iMf, Oliver Wyman analysis

Germany1

+89% (2005-2013)

China2

+198% (2007-2013)

USA3

-59% (2005-2013)

1

15

13

11

9

7

5

3

2005 2006 2007 2008 2009 2013201220112010

1 Annual average: Russian Natural Gas Border Price in Germany 2 Annual average: China LNG Import Price3 Annual average: US Henry Hub Natural Gas Price

2/3

15

the growing mid-range segment for certain products is a strong driver for localizing in emerging markets. the strategy however requires almost full localization, which many manufacturing firms have not been able to implement. limitations in worker qualifications, e.g., language capabilities, the inability to find a qualified local supply base, or the complexity of daily interactions often have prevented companies from localizing their supply chains. these manufacturers thus face the odd situation of having to pay logistics and handling costs twice – once to import materials from suppliers in their home markets and again for the final product to be exported back to that home market. this often leads to a deterioration in cost advantages and has on occasion resulted in back-shoring of production.

finding the right bAl AnCetaken together, there are several major trends which can be expected to further challenge current best-cost country and localization paradigms:

Manufactured products of all types are facing ever more challenging customer demands for features and styling that align with the requirements and tastes of their end markets. this trend favors short supply chains with manufacturing close to the final customer and close cooperation between manufacturers and suppliers. to enable this, manufacturers are establishing regional engineering and marketing centers and focusing more on suppliers who can provide similar localized capabilities. technology and innovation are becoming more crucial to meet increasingly stringent regulatory and consumer needs, driving increased collaboration between manufacturers and suppliers. Additionally, shorter product development cycles raise the need to work closely with strategic suppliers earlier in the process.

from a mid- to long-term perspective, manufacturing companies need to rethink their value-add distribution to respond to shifting demand and further globalize and localize production and engineering. their ability to dynamically “glo-calize” the supply chain will be critical. the competitive end game will be to optimize the global value chain through a superior balance of global synergies and local responsiveness.

Purchasing departments will be measured increasingly by their capability to play a driving role in enabling this goal. that means customizing the best-cost country paradigm to local conditions and making tCO-based decisions based on local and dynamic rationales. to implement a “glo-cally” balanced selection of key suppliers, supplier integration and volume allocations need to take a mid- to long-term partnership perspective and incorporate suppliers’ willingness and ability to make investments and follow the manufacturer to its local markets. in the short-term, purchasing should start with a review of historic supply decisions, particularly of low-cost country sourcing for traditional high-cost sites, as historic cost advantages are fading away. the predominant rationale for continued low-cost country supply should shift from cost to market responsiveness considerations for localized production.

kevin.hauser@oliverwyman.com+1 248 906 79 35 tobias.sitte@oliverwyman.com+49 89 939 49 541

16

globalization of the manufacturing footprint has been an imperative for manufacturing firms for some time, as a means to reduce costs and gain access to new markets. Many manufacturing firms have spent the past decade either ramping up or extending their capacities in eastern europe and China.

in the process, however, many companies also have made mistakes that drained cash or damaged quality. Sometimes, these problems even threatened the existence of the entire company. numerous firms have given up or had to reverse their global expansions. especially small- and mid-sized companies are struggling to develop their international structures and achieve desired operational performance on a global scale. reducing in-house manufacturing costs is one challenge. But it is equally important to establish a strong presence in new markets and find new local suppliers while maintaining a reliable supply chain. At the same time, the parameters driving footprint decisions such as cost factors and manufacturing techno-logies are undergoing dynamic change.

due to this increasing complexity, manufacturers need a fresh approach and new factors need to be included in footprint expansion considerations.

globAliZAtion beCoMes More CoMPlexPast rules are no longer valid. first, the landscape of cost-competitive countries has changed greatly in the past decade, and cost champions have changed as well. According to numbers from Mercer’s total remuneration Survey, Mexico is now cheaper than China, where wages have doubled since 2008. the UK is cheaper than the USA, while in low-cost turkey, wages of production workers have soared by more than 20 percent in the past two years alone.

At the same time, energy costs have changed. Shale gas development has caused a drastic reduction in energy costs in countries that have authorized drilling. in the USA, for example, natural gas prices have fallen by two-thirds since 2008. in addition, a big chunk of manufacturing activity is increasingly taking place close to demand. local content requirements in many markets are increasing and also driving local manufacturing.

ProdUCtion

internAtiOnAlizinG tHe fOOtPrint

of respondents to the latest Oliver Wyman restructuring survey are planning investments to improve their manufac-turing footprint.

41%

17

new, advanced technologies such as digital manufacturing, advanced robotics, 3-d printing, and the internet of things are disruptive evolutions that will progressively reshape the manufacturing value chain. these tech-nologies will lead to totally flexible plants and global visibility on machine utilization and allocation options. All this will radically change the way companies have to design and operate their global manufacturing footprint.

doing things right the first tiMe is CrUCiAldespite the need for globalization, there are many examples of firms that moved production back to their home markets. Key reasons for these moves often include insufficient preparation and poor selection of the technologies and products that were globalized. Underestimating the cost of relocation, deteriorating quality, poor supplier support and efficiency in new plants, as well as rapidly increasing labor costs also contribute.

Consequently, a sound and well-defined footprint redesign plan is crucial. the first step is to understand the company’s value chain for each product type and the associated production processes. this includes identifying potential areas for outsourcing of production.

the second step is to analyze the key trends in the markets the company is targeting. these trends include changes in demand patterns, factor cost developments (energy, wages, infrastructure cost, etc.), and competitor moves. Based on these two sets of analyses, the boundary conditions for the footprint redesign can be defined. this includes a volume plan for produc-tion, a manufacturing concept, and strategic priorities for the future footprint, such as the desire to combine different products in a specific plant or to move or build certain capabilities in a new location.

in a third step, scenarios for the future manufacturing footprint should be developed and the financial implications assessed. this should include invest-ments, working capital development, and savings on labor and infrastructure costs, as well as the impact on administrative costs, production overhead and energy, logistics, and taxes. there will also be negative impacts that cannot be avoided, such as lower quality during the ramp-up of new plants.

After selecting the favored future footprint, a detailed relocation concept and a cross-functional transfer team that is fully dedicated to managing the relocation concept needs to be installed. Particular attention should be paid to the recruiting or training of skilled personnel at the new sites, as well as retention of key people at the existing sites.

good PrePArAtion MAkes the differenCeto improve the footprint successfully and efficiently, diligent and com-prehensive preparation is essential. the important factors here include considering the strategic boundary conditions for the entire value chain, investing sufficient time and resources in planning, building a business case based on total cost calculation, and installing comprehensive process management. this will enable companies to identify, assess, choose, and implement the best options and minimize future risks.

internAtiOnAlizinG tHe fOOtPrint

bernard.birchler@oliverwyman.com+33 1 45 02 32 28lutz.Jaede@oliverwyman.com+49 89 939 49 440

Compensation in manufacturing

Source: Mercer total remuneration Survey, Oliver Wyman analysis

UK 40

Turkey 23

USA 44

Mexico 7

Brazil 15

China 8

Vietnam 4

Germany 53

Turkey 21

USA 12

Mexico 11

China 29

Vietnam 39

UK -1

Brazil -7

Germany -1

Annual salary of plant workersIn thousands of US-Dollars, 2013

Change in plant worker salaryFrom 2011 to 2013, in percent

18

in the machinery and industrial equipment industries, the sales function is the vanguard of globalization, and over the past few decades, many companies in the industry have built up international subsidiary sales networks. but presence alone does not equate to efficiency or effective-ness – there may be significant room for improvement.

in light of increasing competition from emerging market players, the impor-tance of sales and service for Western machinery and industrial equipment manufacturers cannot be overstated. Companies from emerging countries are likely to have significant deficits in these areas and will need time to catch up – more time even than in other areas like product technology and quality. to maintain a competitive edge, companies globalizing from a base of mature markets must deal with three critical challenges.

ProfessionAliZAtion And bUilding UP CoMPetenCiesAlthough many european companies have long-established global sales networks, sales resources are still largely based in europe. in addition, there is often a relatively large gap in capabilities between headquarters and international subsidiaries, in terms of product and sales know-how. the reasons for the gap may be that local employees often start to work in sales without appropriate training; they do not have the same informal proximity to technical functions (as would be the case at headquarters); and they may be neglected when it comes to new training measures. furthermore, international subsidiaries are often insufficiently integrated into strategic and tactical sales management. Although topics such as the implementation of customer-segment-specific sales strategies, poten-tial-based customer prioritization, or value-based pricing are state-of-the-art among leading machinery and industrial equipment manufacturers today, this is largely only true at headquarters. implementation in foreign subsidiar-ies often lags behind.

three-quarters of revenues for this industry are generated internationally, while at the same time, the sales process is becoming more complex. Obvi-ously then, the quality and success of international sales must not be left to chance. there must be a willingness to make more systematic and sustained

sAles

65%of sales and marketing staff of leading German mechanical and plant engineering companies are still based in europe today.

enHAnCinG tHe WOrldWide SAleS SYSteM

19

investments into the global sales network. A variety of measures can be applied: establishing more training, providing active, on-the-job assistance from experienced sales staff, and increasing support for local sales through the use of local product specialists or through intelligent product configurations.

fUrther develoPing sAles MAnAgeMentin many areas of the machinery and industrial equipment manufacturing industry, personal direct sales are the traditional primary sales channel. A country’s specific cultural sales traditions also need to be respected, such as the use of distributors as a sales channel in China. leveraging local structures not only ensures close alignment with market needs, but can make the buildup of a broad sales presence in new markets go faster.

the industry also is witnessing a polarization of business types, and sales must respond to this with differentiation of channels and approaches. On the one hand, simpler, less valuable machines need few explanations and are subject to high cost pressure. Here, personal direct sales no longer pay off, and it is important to find more cost-efficient sales channels, such as dealers or the internet. On the other hand, for complex solutions, where diverse products and services are bundled for individual customers, sales must include more consulting expertise and requires higher com-mercial qualifications.

international key account management is also reaching a turning point. initially, it served as a coordinating function for regionally structured sales organizations. now, as key customers increase in size, it is becoming a critical factor and a lead dimension. As a result, key account management is becoming more like a separate sales channel that draws on regional sales structures in line with customers’ needs.

liMiting CoMPlexity And sAles CostsAs international subsidiaries grow and their business becomes more complex, there is a growing risk of cost increases and deteriorating trans-parency as well as manageability. And in fact, the sales cost ratio of european manufacturers rose by ten percent on average between 2008 and 2013. developing process and structure “blueprints” for sales subsidiaries is one proven method for managing complexity. these include definitions of idealized target staff levels and target cost pools. Blueprints must be differ-entiated by size and type of location and adapted to a country’s specific requirements.

Machinery and industrial equipment manufacturers that manage to success-fully meet the challenges outlined above can move their global sales systems to a new level, helping them maintain their competitive edge. it is important, however, to look out on two fronts: first – change is needed at headquarters and not only in the field. And second – in designing the concept of the sales system, it is important not to lose sight of the ultimate goal: to enable sales staff to sell more and better – all over the world.

wolfgang.krenz@oliverwyman.com+49 89 939 49 403 wolfgang.weger@oliverwyman.com+49 89 939 49 430

Change in sales cost ratio in the mechanical and plant engineering sector 2008 vs. 2013, in percent

Source: 49 european mechanical and plant engineering companies

enHAnCinG tHe WOrldWide SAleS SYSteM

1st quartile Median 3rd quartile

+10

+22

-1

20

CorPorAte orgAniZAtion

OrGAnizAtiOnS MAde tO GO GlOBAl

Autonomy and consistency over maturity stages

Consistency(standards)

Autonomy

Stage 1 Stage 2 Stage 3 Stage 4

Maturity stages

without a doubt, “organization” is one of the most critical levers in the successful implementation of a new corporate strategy. this is particularly true for globalization strategies being developed by manufacturing companies in response to the growing importance of international, and especially emerging, markets. to implement these, the organization as a whole must be reassessed and reinvented.

As their businesses grow ever more global, many manufacturing companies are facing the challenge of adapting their organizations to meet their wider business horizons. “Organizational globalization” can be viewed as a process of evolution, in which manufacturing companies typically progress through four maturity stages. there are three key challenges which globalizing companies need to manage to successfully progress to stage four.

bAl AnCing loCAl AUtonoMy And globAl ConsistenCyto jumpstart international business activity, a high degree of autonomy often is given to newly established country organizations. initially, these local units typically focus on sales and subsequent service and may act much like independent dealers. flexibility, agility, and rapid response to customer requirements are key. At this stage, there is not much headquarters can do in terms of support – other than providing premium products for sale. As the business grows and the scope of local activities increases (engineering, sourcing, production, product responsibility, etc.), corporate naturally will want to drive these activities from a more strategic perspective, particularly as the company will also be exposed to more risks, and more resources (management, technicians, financial) will need to be deployed locally. inter-dependencies with other parts of the business also will increase, requiring greater coordination, for example to manage emerging global key accounts. Con sequently, autonomy at the local level will begin to decrease.

legacy processes inherited from headquarters should be reconsidered as the company evolves toward global integration: While consistent processes are needed to coordinate global operations and support excellence, global-izing offers a unique chance to capture and deploy best practices across all operations, regardless of the source of these best practices. Ultimately,

21

OrGAnizAtiOnS MAde tO GO GlOBAl what is needed is an “excellence system”; that is, a consistent definition

of operational management and business policies, standards, processes, methods, and tools that work for the organization as a whole.

designing the right orgAniZAtionHistorically, countries or regions were only sub-structures within the sales and service function of organizations that were primarily segmented by function, or by business and then function. With an increased share of inter-national business outside of the home market, however, and as additional functions and resources beyond sales and service are set up regionally (sourcing, engineering, production, etc.), new organizational questions arise:

• How should functions within each region be bracketed?• What should the responsibility for such a bracket entail?• How should this responsibility be represented at the corporate level?

the answers to these questions depend on many factors, such as whether a function that is allocated to a region only generates outputs for this region, or if it represents “shared services” for the company globally, but is advan-tageous to set up in a certain region (e.g., due to lower costs). in any event, most globalizing manufacturing companies find that they need to migrate to more matrix-like organizational structures, capable of supporting both a global, functional perspective (synergy, quality) and a regional perspective (market orientation, agility). effectively balancing these two dimensions not only requires redesigning involved roles and responsibilities, but an advanced level of managerial maturity. One way to reconcile these dimensions, which has proven effective for companies at this point in their transformation, is to establish a “two-hats” model for the executive Board, where each

Maturity stages in organizational globalization

Opportunistic export

Stage 1

Export world champion

Headquarters

Sales & service subsidiaries

Integrated regional units

Stage 2

Time

Localization (organic, acquisition)

Stage 3

Integrated and global company

Stage 4

22

executive is responsible for a region in addition to a (primary) responsibility for a business or a function. Whether this model or another is used, it is critical that the regional dimension receives an “upgrade” in the overall governance structure of the company.

As companies move from maturity stage 3 to 4, it is crucial that regional management is fully integrated into all corporate processes (strategy setting, innovation roadmap, investment and resource planning, etc.). in fact, the concept of “headquarters” versus “region” should vanish, as all functions should carry equal weight regardless of their location. “Global responsibility” no longer equals “headquarters function” – functions can be located anywhere in the world. equally, executives from outside of the home country need to be adequately represented on the executive Board and in other management bodies, increasing the diversity of these teams.

develoPing A globAl CUltUre And MAnAgeMent teAMin a recent Oliver Wyman survey, leading German manufacturing companies reported that they expect the number of their employees based outside of europe to rise from an average of 25 percent in 2009 to nearly 44 percent by 2018. Clearly, legacy home market cultures will need to evolve in step to embrace the diverse perspectives of a more international employee base, with the goal of a true “corporate” culture, that can provide the company with a new global identity.

One of the toughest challenges in global integration for manufacturers can be building a management team able to cope with the new global footprint. Usually, globalization starts from the bottom (e.g., local sales and service, local offices), but companies would realize increased efficiency if they internationalize their management teams at the same speed. Global manage-ment requires a trade-off between expatriates and local recruits: expatriates ensure proper connections to corporate functions, have trusted relationships with top executives, and can ensure relevant business standards are imple-mented locally. local recruits on the other hand enable local integration into communities (clients, suppliers, employees, authorities), provide a sense of local identity for the company, and can be developed to take on future management positions as the local business expands.

wolfgang.krenz@oliverwyman.com+49 89 939 49 403sebastien.Maire@oliverwyman.com+33 1 70 75 01 81

44%of employees of German manufacturing companies will be located outside of europe by the end of the decade, according to a recent survey.

interview with Prof. dr.-ing. Udo UngeheUer, President of the vdi, the AssoCiAtion of gerMAn engineers

23

“infOrMAtiOn teCHnOlOGY SeCUritY Will MAKe Or BreAK indUStrY 4.0“interview with Prof. dr.-ing. Udo UngeheUer, President of the vdi, the AssoCiAtion of gerMAn engineers

debate within industry is currently dominated not only by the topic of globalization; “industry 4.0” also has become a key issue. in this interview, Prof. dr.-ing. Udo Ungeheuer describes the challenges and examines the benefits for German industry.

Professor Ungeheuer, in your opinion, what are the implications of “Industry 4.0”?

“industry 4.0” has a high priority for germany as a production location. digitization and total connectedness will change industry – from product development, through production and the corresponding business processes, to after-sales processes such as diagnostic, maintenance and repair, etc. the conditions in germany for successfully shaping the upcoming change are favorable – we just have to get it right.

The vision of “Industry 4.0” is that, in a smart factory, machines and products communicate with each other, to jointly produce lot size 1 flexibly and cost efficiently. To what extent have machinery and industrial equipment manufacturers implemented this vision?

in a nutshell, machinery and industrial equipment manufacturers have not come far enough yet – and they aren’t open enough, either. large companies adopted “industry 4.0” a long time ago. however, for small and medium-sized companies (sMes), “industry 4.0” is a much more difficult topic, because they need to deal with an element that is not traditionally part of their own value chain. in addition, there is still too much uncertainty about it security, the required it infrastructure, and the protection of proprietary know-how.

Who will define the standards of “Industry 4.0” and, from your point of view, what is the position of the German industry?

that is one of the key questions. there is the danger that a handful of dominant market players, such as global internet or it companies, will assert standards that are more or less proprietary. however, in the case of “industry 4.0,” this will hardly have the desired effect. indeed, 4.0 will not work without the know-how – in the form of data – of german machinery and industrial engineering manufacturers. this points to a traditional conflict, if not enough is done to assure companies’ individual data security.

About Prof. Dr.-Ing. Udo UngeheuerUdo Ungeheuer was elected President of the Vdi in november 2012. Before that, he had been a member of the corporate management of Schott AG, headquartered in Mainz, Germany. from 2004 to 2012, he was chairman of the management board of the international special glass manu-facturer. Mr. Ungeheuer began his career at BMW, where he was last in charge of logistics, technical planning, and test vehicle construction. Udo Ungeheuer studied mechanical engineering and earned his doctorate at rWtH Aachen University. in 2006, he was appointed an honorary professor at the University of Applied Sciences Mainz.

PrOf. dr.-inG. UdO UnGeHeUer

President of the Vdi,

the Association of German engineers

24

however, the attempt to achieve widespread consensus is not the right strategy either – the process would take too long, and other countries would clearly overtake germany. Consequently, we must quickly develop and discuss ideas, e.g., on reference architectures and data security, with each other. At the vdi, we have already come up with suggestions for this. we now need to improve on these suggestions and, finally, define the standards in the traditional way. we in germany must present the first draft. the key german standardization associations, din, dke, and the vdi have already taken up discussions with each other.

Which companies will benefit? For which companies is “Industry 4.0” more of a threat than an opportunity?

“industry 4.0” is all about new products and, in particular, new processes before, during, and after the manufacture of a product. Companies that fail to actively support current developments might be too late. Currently, the it world in particular is discovering new business areas in industrial production and associated services in the context of “industry 4.0.” As a result, today’s situation is forcing machinery and industrial equipment manufacturers to defend their terrain. if, as part of digitization and total connectedness, it companies actually manage to capture elements of value creation, this would be a disadvantage for germany as a production location. Consequently, we need to strengthen the it that we need for “industry 4.0” in germany. the same also applies to microelectronics.

What is your view on the issue of data security?

from my point of view, three simple, but concrete questions need to be answered if “industry 4.0” is to be a success and implemented nationwide. first, who will care for the small, medium-sized, and even large supplier who, because of digitally driven value creation transparency on costing and pricing, is experiencing a digital lopez ko? does that make the supplier a loser? secondly, who will protect the medium-sized hidden champion from the black forest, who will be forced to digitally share his know-how across a product’s entire life cycle, across all production stages, assembly pro-cesses, and maintenance and repair? Companies that don’t protect them-selves can forget about the “hidden” and about being a champion. And last but not least, who will look after the interests of oeMs and protect their new business ideas, for example fully automated maintenance and repair based on internet use, from “theft” by global internet companies?

thus, it security – which is more than mere data security – still needs a lot of answers and, at the same time, it will make or break “industry 4.0.” if we fail to master this challenge, “industry 4.0” will not be successful. Consequently, i am happy that the vdi has already defined initial automa-tion standards with the vdi/vde 2182 standard. but that will not suffice. it security cannot be assured by technical means alone. organizational measures are even more important, and this means that every company must face up to its responsibilities.

About VDIVdi, the Association of German engineers, is a strong association that supports, promotes, and represents engineers in their work. it has been a reliable partner for German engineers for more than 150 years. every year, more than 12,000 voluntary experts evaluate the latest insights on promoting Germany as a technology location. With its 152,000 members, Vdi is the largest engineering association in Germany.

25

New business designs are needed to successfully put the concept of “Industry 4.0” into practice. In your opinion, what will they be?

there are many business designs that are possible. however, in our opinion, services will be introduced at very different points in time. let’s start with a number of business designs related to cloud computing that the vdi has investigated. some of them can already be implemented today, but they are not yet widely deployed. however, total connectedness and digitiza-tion and, thus, business processes based on them, will not become a reality before 2020.

Your conclusion: is “Industry 4.0” a hype exaggerated by the media, or one of German industry’s core issues?

no, “industry 4.0” is indeed the core issue for german industry. in a globalized world, if germany is not successful in adopting “industry 4.0,” this will spell competitive disadvantages for our country as a production location. the good thing about “industry 4.0,” which was deliberately coined as a german term, namely “industrie 4.0,” is that it has been possible to get key players in the german industry to sit down together to achieve a common goal. this success, in terms of public impact, can already be seen today – a first in the industry’s history. other countries have taken note of the german initiative. they have seized the opportunity and are already waiting in the wings with similar programs – so we have to be quick.

Professor Ungeheuer, thank you for the interview.

this interview was conducted by thomas kautzsch, Partner and head of the Automotive and Manufacturing industries Practice of oliver wyman.

What services can be increasingly and additionally offered thanks to cloud computing? in percent

Source: Vdi / Vde-Gesellschaft Mess- und Automatisierungstechnik

Evaluation of faults 53,9

Diagnostics 52,8

Documentation 52,0

Overarching resource management

46,1

SOP support 45,8

Order/service parts management

32,8

Asset management

Other

20,7

1,8

Software update management 61,3

26

Machinery and plant engineering are under pressure to transform. Most large transformation projects fail, however. to be successful, such projects – particularly those focusing on modernizing information technology platforms (so-called platform renewal projects) – must be approached as a holistic challenge.

the key challenges industrial companies are facing now include managing growth and globalization, eliminating inefficiencies, defining a competitive product strategy, and exploiting technological advances. it, as an enabler of the business, is responsible for finding the technological solutions that can support a company’s efforts to respond to these challenges. this usually requires more flexible and scalable it platforms. At the same time, it depart-ments often struggle with internal challenges that can impact the pace of modernization of existing platforms within the company.

why ProJeCts fAilOne out of three platform renewal projects falls short of the mark. in most cases, companies accept delays and take countermeasures by modifying the project’s objectives and processes. Why does this happen?

Companies do recognize the potential benefits of it platform renewal projects at a qualitative level, such as enabling growth, accelerating time-to-market, and reducing process and operating costs. they rarely translate these benefits into a quantitative business case, however. Since platform renewal projects can additionally include transformational aspirations, their goals and rationale tend to get blurred. As a consequence, companies may fail to focus on achievable goals and may seek to address too many business areas and processes in parallel – overwhelming the internal organization. Moreover, operational planning is often not up to par, meaning that companies are unable to adhere to project roadmaps and underestimate the effort involved in the trans formation. Ultimately, many projects fail for one simple reason – they overshoot the actual mark and don’t focus on essential changes.

it trAnsforMAtion

MOdernizinG it PlAtfOrMS SUCCeSSfUllY

of all it platform renewal projects fail to achieve the desired results.

>30%

27

five MeAsUres for sUCCess1. Integrated transformation approach: A holistic transformation

concept is based on overarching corporate strategy and takes the dimensions of business processes, organization, it, and corporate governance into account. this structure calls for clearly defined responsibilities and ownership for the platform renewal project on the part of the board and operational management. Because an integrated transformation program is highly complex, it is important to clearly focus on achievable goals and to implement them across clearly defined business areas and processes.

2. Transformation geared to value contribution: Platform renewal projects are fated right from the beginning if their quantifiable benefits to the business are not defined. even if a company manages to initiate a project with, for example, the help of active supporters, there will be no lessening of the calls for value contribution and purpose during the course of the project. furthermore, questions will be raised about effort and duration, especially at strategic milestones.

3. Joint management of platform renewal projects by the functional department and IT: Modernizing the it platform is not an end in itself for it. the main focus is on business requirements, and it is critical to success to involve the functional departments from project kick-off through launch. Consequently, the functional departments and it should be jointly responsible for implementation.

4. Invest in excellence during implementation: implementation success largely depends on the availability and commitment of core project resources, who must consequently be freed from other tasks. in addition, it is important to set up program management that synchronizes and prioritizes the platform transformation roadmap with any urgent roll-out and development needs for the existing platform.

5. Intelligent scope/release planning: it is important to manage the transformation in a way that minimizes the risk involved. intelligent scope/release planning, which has both a functional and a technical dimension, plays a key role in this. from a functional perspective, it is crucial to derive realistic platform requirements from general strategic conditions and operational business. the technical perspective highlights architectural components that can be introduced in the form of modules as well as multi-release strategies.

Platform renewal projects are the foundation for machinery and plant engineering companies to secure their competitiveness in the long term. these projects do place high demands on it, and often their expected potential can only be unlocked if they are combined with a holistic trans-formation of the company. the success factors described above provide a starting point, but of course must be customized to the exact needs of each company and transformation project.

MOdernizinG it PlAtfOrMS SUCCeSSfUllY

florian.deter@oliverwyman.com+49 89 939 49 572 nico.hartmann@oliverwyman.com +49 89 939 49 594

Main reasons for the failure of large-scale IT projects in percent

Source: Survey done by CiO2CiO and idG Business research Services of more than 150 it decision makers in medium to large German enterprises in 2012 on behalf of Oliver Wyman, multiple answers possible

Exaggerated expectations from the client

Changing business requirements

Lack of strategic coordination

Lack of soft skills

Project delays, failure to meet project timeline

Problems with project planning

Inadequate budget calculations

Overly aggressive sales pitching by imple-mentation partner

Other reasons

N = 127

43

40

29

29

25

62

17

8

15

28

rAPid ebitdA iMProveMent

Private equity firms rely on several levers to create value in their acquired assets, the most important being opera-tional improvement. As a result, the industry has enjoyed significantly higher shareholder returns than other private and publicly traded companies. with economic recovery taking hold, manufacturers should consider implementing some of private equity’s proven practices to spur growth.

the levers available to improve operating profitability in manufacturing are well known, yet deploying these levers in a holistically successful way and delivering significant impact remains challenging. Understanding this, anyone who reads the business press can admire certain CeOs or certain transformational programs that have dramatically increased a company’s performance. these successes are rarely based on a new set of profitability levers, but rather on the acumen, discipline, resources, urgency, and transformational agenda brought to the profitability improvement program. eliminating the “business as usual” mindset – by shaking up priorities, organizational structure, or governance – is the key ingredient in these cases.

the private equity (Pe) industry has long enjoyed the benefits of such shake-ups, using their new ownership as a catalyst for change in their port-folio companies. in addition, the full-court press they apply through the use of dedicated teams of internal and external industry-specific operations experts, together with a “leave no stone unturned” mentality, creates the right environment for big changes to take hold.

Using as many levers as they can uncover, including sourcing cost reduction, product cost down, manufacturing improvement, overhead reduction, pricing enhancement, etc., it is rare that a Pe firm doesn’t significantly improve a company’s eBitdA (earnings before interest, taxes, depreciation, and amortization) – often to levels that surprise the incumbent management team. for the Pe firm and its shareholders, each dollar of sustained eBitdA improvement is worth $8-$10 in equity increase – a clear incentive to move fast and make major changes. Pe firms clearly understand that the invest-ment required to make transformational programs happen is insignificant at these return levels.

What each $1 of eBitdA improvement at a portfolio company is worth to the equity holders in a Pe fund in 2014.

$8-$10

AdOPtinG PriVAte eqUitY’S PlAYBOOK

29

levers for rAPid ebitdA gAinsHistorically low interest rates in today’s financial markets have created a valuation boom in the Pe sector. Whereas the bulk of purchase multiples in the manufacturing sector were in the 6-8x range a mere three years ago, today’s deal multiples are gravitating toward the 8-10x range, largely due to the low cost of leveraged financing. thus, Pe firms must extract more value from post-acquisition operations improvement to ensure that they recapture their investment at exit. Oliver Wyman has developed a “rapid eBitdA improvement” playbook that is being used by a number of Pe clients; it comprises a set of proven levers for generating both sales growth and cost-out in a rapid and sustained manner:

• Sourcing cost reduction: Gaining leverage over incumbent suppliers of both direct and indirect materials and services, often utilizing synergies with other portfolio companies or purchasing consortia, can be a critical source of value. Understanding where to find quick wins and expertise in each commodity is key.

• Product cost down: Using a network of industry experts to provide engineering and materials expertise, together with the most sophisticated design tools available, manufacturing companies are revisiting legacy designs and practices to determine where costs can be reduced or eliminated.

• Pricing strategy and service parts pricing: linear regression-based pricing using competitive data sets and real-time market feedback is helping manufacturing companies find the peak of the marginal demand curve for each of their products.

• Manufacturing operations and value chain improvement: A “clean slate” approach to manufacturing assets and make-versus-buy often results in tough decisions for the management team. A holistic, transformational agenda is necessary to establish the case for change.

• SG&A optimization, sales force effectiveness, headcount reduction, and MrO improvement are other levers of equal importance.

iMProving ebitdA: not JUst A PrivAte eqUity ProbleM What about manufacturing companies that aren’t Pe owned? A hasty reaction might be that their financial structures, incentives, and risk profiles are different and, therefore, Pe-like transformations aren’t applicable. However, the similarities with private equity far outweigh the differences: Both types of firms have shareholders seeking growing returns and a desire to outperform the market. Both have enterprise values that the market calculates by applying a ratio to profitability. And both have the resources and availability of expert partners to help them execute large scale change. Once the starter pistol is found – an appetite for change – the transformation can begin.

Rapid EBITDA improvement framework 13 specialized tools impacting each area of the value chain

kevin.hauser@oliverwyman.com+1 248 906 7935 tobias.eichner@oliverwyman.com+49 89 939 49 774

Direct materials sourcing (Tier 1)

Indirect sourcing

Tier 2 sourcing

Suppliers

Product developmentProduct cost down

Sales and marketingSales force e�ectiveness

ManufacturingFacilities consolidation

Operations improvement

MRO optimization

Labor/headcount reduction

Make/buy rationalization

SG&A reduction

Enterprises

Pricing and customer profitability

Service parts pricing

Customers

30

PriCe MAnAgeMent

the spare parts business has come to play a key role in machinery and industrial equipment manufacturing. After years of continuous optimization, however, the time has come for the next step in the process of professionalization: optimizing spare parts pricing, through innovative approaches that could significantly improve both margin and revenue.

Over the past 10 to 15 years, the spare parts business has become an important source of profits for machinery and industrial equipment manufacturers. As a result, nearly every company has optimized and expanded this segment over the course of time by applying levers such as pricing systematization, bundling, relabeling, spare parts logistics, etc. in addition, companies have become more active in spare parts marketing and have improved overall organizational systems and management systems. today, manufacturers can see gross margins of 40 to 50 percent or in some cases even higher – depending on the range of parts they offer, and the degree of professionalization and management objectives. Combined with a growing installed machine base, the spare parts business has contributed significantly to profitable growth for many players.

innOVAtiVe SPAre PArtS PriCinG

Margins realized in the spare parts business Contribution margin as a percent of spare parts revenue

B

51

C

41

D

37

E

42

F

56

A

52

Sample companies

31

AdAPting to A new MArket environMentrecently, however, most machinery and industrial equipment manufacturers are facing a more difficult environment (e.g., growing competition, changing customer requirements, regional mix) that in some cases has even led to stagnating spare part volumes or revenues.

Companies must be prepared to invest, if they want to attain the next level of professionalization for this business, eliminate the shortcomings of previous approaches, and adapt to current market realities. A major lever in this setting is to rethink spare parts pricing and to apply more innovative approaches.

One shortcoming, for example, is that most machinery and industrial equipment manufacturers lack transparency on global markets and com - pe titive situations in the spare parts business, since many largely focus on domestic markets. furthermore, pricing systems still tend to be based on a cost-plus orientation (although this is more rule-based now and thus easier to understand). last but not least, there is little if any integration of spare parts pricing throughout most organizations, and corresponding manage-ment systems – such as for implementing prices – are more or less lacking.

What’s more, machinery and industrial equipment manufacturers must rise to the challenge of a market that is becoming increasingly global, with new and more complex competitive conditions. these factors influence customer relationships and willingness to pay, as does the realization of many customers that spare parts is an extremely profitable segment for manu-facturers. Customer tCO approaches must be developed within this context.

ProfessionAliZAtion As An oPPortUnityAverage margin increases of five to twelve percent in relation to total spare parts revenue have been achieved on Oliver Wyman projects. for companies generating spare parts revenue of around 200 million euros, this corresponds to an additional profit of 10 million to 30 million euros.

Achieving such an improvement requires a number of changes; in particular, a stronger outside-in orientation in pricing and a move away from traditional purely cost-plus-oriented pricing. it is essential to systematically analyze global markets and competitive dynamics within the spare parts business i n a way that goes beyond historic case-by-case analyses.

in addition, advanced spare parts pricing requires the use of more innovative tools and algorithms that clearly incorporate more factors and thus allow valid statistical conclusions to be drawn. Controlled pilot projects can be used to minimize risks and make qualified decisions. last but not least, the pricing strategy and pricing system must be incorporated into tools, processes, and structures (organizational and management) to ensure long-term impact and lay a foundation for future development.

the changes we propose are substantial. But in our experience, companies willing to put in the work can see a significant increase in revenues and profits in the short term by applying the above-mentioned levers.

scot.hornick@oliverwyman.com+1 630 544 1400 wolfgang.weger@oliverwyman.com+49 89 939 49 430

is the typically achieved margin increase in spare parts pricing on Oliver Wyman projects.

5-12%

32

Cost redUCtion

Classic approaches to reduce product costs cannot be easily transferred to the industrial products and equipment sector. the volumes are smaller, the variances higher, and cost-benefit calculations look different. thus, it is critical to tailor the approach to the unique “fingerprint” of each enterprise, its product portfolio, and each product’s cost profile along the life cycle. oliver wyman’s “tailored Product Cost down” (tPCd) methodology delivers just that.

intensifying global competition, price pressures, and ever more product complexity are increasing cost pressures for the industrial products and equipment industry. Product costs include purchased components, manufacturing-, assembly-, and supply and logistic costs, and then repre-sent 60 to 85 percent of the total costs. data on various product cost down projects show that 30 to 40 percent of those costs can be reduced if addressed during the product development phase, and still 2 to 10 per - cent during series production, if the right levers are pulled.

foCUs on the enterPrise And the ProdUCttraditional mass production-based cost reduction approaches are straight-forward: generate various cost improvement ideas within a part- or com-ponent group/system and benefit from the multiplier effect of high series and service parts volume. this logic does not apply to the industrial products and equipment industry: not only are volumes smaller and the numbers of variants higher, also cost profiles along a product’s life cycle look different. development and indirect cost represent a higher overall percentage of the total. therefore, a focused methodology is needed to ensure an advantageous cost benefit ratio. Oliver Wyman’s “tailored Product Cost down“ method-ology is a systematic approach that prioritizes scope and individually identifies the right levers first and then utilizes the most effective methods and tools to optimize costs.

At the core of the tPCd-program stands the product. the development of a product portfolio-wide view of the “Bill of Materials” (BOM) reveals overlaps and shared parts. Which lever promises the highest savings potential depends on assessing a part/sub-component “value,” its life cycle cost pattern, including investments, its cost structure in the running

Product cost reduction is possible during the product development phase.

>30%

tAilOred PrOdUCt COSt dOWn fOr indUStriAl PrOdUCtS And eqUiPMent

33

series, and associated service parts, as well as the potential switching and validation costs for changes, including risk aspects. typical levers are design changes, rationalization of specifications, joint optimizations with supplier input, supplier changes, or supply chain adjustments. the program also incorporates l essons learned from prior initiatives as well as knowledge transfer from other industries. further consideration is placed on over-arching and functional lever points; these include best-cost country (BCC) sourcing or the optimization of packaging and logistics. in cases of a high overhead cost percentage, a look into the larger indirect cost drivers also typically proves worthwhile.

finally, there is the question of whether processes, systems, and the organization as a whole are optimally configured to support a holistic cost reduction approach for the long-term. the best methods and tools to support cost reduction must be identified and adopted in categories, such as product design, cost transparency, purchasing and supply, and manu facturing. these methods and tools include, for example, specifi -cation based analysis, cost/feature regressions, cost driver analyses, best-of-bench mark comparisons, market tests, and supplier workshops.

trAnsPArenCy is keyHow a product cost down project is defined, so that it is financially beneficial, is part of a one to two week joint “Product Cost Audit.” this audit also includes the identification of the largest cost reduction levers as well as defining the custom project approach. Via data requests, supported by deep dive interviews and workshops, transparency is generated. Cross-referencing

Product cost down savings range from 30 to 40 percent at early lifecycle stages to 2 to 10 percent at later stages in percent

Manufacturing company

100R&D

Sales & administration

Packaging & distribution

Manufacturing & assembly

Product costs

Development30-40

Production3-10

After-sales & service2-5

Raw materials

Purchased parts 30-45

15-25

10-20

4-6

8-12

3-6

Illustrative cost structure Savings potential along the product life cycle

PrOJeCt ex AMPleS

As an example, a machinery and plant builder serving a highly customized product environment sought savings of ten percent through a tailored product cost down program, but ended up realizing significantly more. Key to success was the significantly higher cost and impact transparency as well as a staged imple-mentation plan over the mid- and long-term. this was further supported by the combined management of all product relevant cost reduction initiatives paired with an overarching cross-functional target setting and incentive design.

for an aerospace & defense industry client, Oliver Wyman supported a tPCd-program to enhance the com- petitiveness of a single/one-off build product family. this resulted in a 20 percent reduction of the addressed direct product costs. Based mainly on the benchmarking of the internal and external cost drivers, the breakthrough was attributable to a more competitive supplier portfolio, enhanced product standardization, as well as a product group specific mix of modularization, material substitution, and combination of actions.

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external benchmark data with generated internal information enables the alignment of project goals, levers, and the chosen approach, while utilizing experiences with similar projects and clients. Cross-functional project teams (engineering, Purchasing, Production, quality, and logistics) prepare and run those activities. As a point of reference, a baseline is developed jointly between enterprise, customers, and suppliers, to enable the generation and assessment of cost savings ideas.

in summary, through product cost reduction initiatives, significant savings can be achieved in the industrial products and equipment sector – as long as for each enterprise the relevant core levers and actions are identified individually, based on a thorough methodology, and are embedded in a viable tailored program from a cost benefit point of view.

Joern.buss@oliverwyman.com+1 313 443 40 14 tobias.sitte@oliverwyman.com+49 89 939 49 541

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