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Balancing cost reduction with future demand at Siemens

Jul 12, 2011 10:10:00 AM

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Dietmar Harteveld [DH], Director of Indirect Material for North West Europe at Siemens discusses how functional calibration and deep stakeholder engagement can help drive savings today and help understand where tomorrow’s value is really coming from.

CG: Hi Dietmar, thanks for joining me today - can you tell me a little more about your role within Siemens?

DH: Certainly, Siemens has a centralised structure for all internal third party and inter-company spend which comes under one global organisation. The direct procurement groups, sit within their own sectors so they’re slightly separate.

I sit within the global indirect procurement group and look after the region North West Europe which includes UK, Denmark, Sweden, Netherlands, Norway, Poland, Ireland, Finland and the Baltics.

The role has responsibility of the total Indirect spend, working with each of the business units for the region.

The indirect material team looks after commodities such as professional services (engineering, technical or temporary labour), logistics (standard or project based), Mobility (Travel & Fleet), IT and Industrial (Energy, Factory Supplies and Real Estate) – I  manage the people across the North West region, maximising the opportunity for the Indirect spend (whether that be on the demand or the spec – as these are the key drivers for indirect material)

One of the main drivers for the indirects team is generating savings (value to the organisation) probably more importantly it’s about changing habits and behaviours around how people think about spending our  Company’s money.

CG: Perfect – can we quickly step back and talk about the manufacturing industry for a moment. Can you give me a bit of an overview on some of the key issues and trends that we can expect to see over the next 12 months?

DH: Sure, I’ll cover two elements. One is the overall business side and then more specifically looking at Siemens and the procurement side.

Within Siemens, we work in three major sectors (soon to be four): 

  • Industry: The Industry Sector, a leading global supplier of production, transport and building technologies, is Siemens’ largest sector, employing about 222,000 people worldwide. The sector comprises the six divisions Building Technologies, Drive Technologies, Industry Automation, Industry Solutions, Mobility, and Osram.
  • Healthcare: medical imaging, laboratory diagnostics and medical information technology The Healthcare Sector includes specialist companies such as, Siemens Magnet Technology, Siemens Healthcare Diagnostics, Siemens Hearing Instruments and Siemens Molecular Imaging. 
  • Energy: Pretty much the whole spectrum from the provision of power through transmission and transformation this includes gas generation, renewables such as wind and solar
  • Recently announced new sector; - Infrastructure and Cities

Each of the various sectors is impacted differently, so if we look at energy (particularly in the UK) we can see that there’s been a large increase in maintenance spend as the power stations age. Looking globally, the increasing demand for power in China, Russia, Brazil has required an increased level of spend in energy generation and transmission over the last two to three years, which goes against the behaviour we have been used to during the poor performing economic environment.

That’s not to say it isn’t still tough but there’s an inherent demand and a strong business need because if you take again the UK for example, if they don’t invest in maintaining and renewing some of their plants, there won’t be energy to supply the population. Energy at one end of the spectrum has seen good growth, so it’s probably bucked the trend - the industrial group definitely has seen reductions in capacity which has meant plant restrictions, but overall the industry sector has started to grow (which is a good lead indicator for the manufacturing Industries)

I think the overall knock on impact, with healthcare being in the middle, is a reduction in spending in the industrial area, maybe the diversion of funds, from other areas to support the energy area, we have definitely seen the markets tighten up in terms of what gets funding and what does not and as a result a much stronger controlled manufacturing output. The recovery has definitely started and as a result of this from a procurement perspective, is and will continue to be a significant increase in price compared to last year (on average for us I’d guess around two and half to three percent).

It’s a big question, but overall, we’ve seen funds diverted from the industrial areas to some of the infrastructure areas. We’ve definitely seen a restriction of capacity and over the last two years the supply base has been easier for us to deal with as they are also trying to recoup some of money lost through the diversion of cash.

If I take my area, which is the internal spend, the same has occurred. We’ve seen greater all round restrictions (and focus) on costs with more acknowledgement of the benefits of the internal third party spend.

Organisations that have had a freedom on internal spend over the last seven or eight years are starting to look harder at their indirect strategies – moving towards a true sector spend model.

CG: Thanks for such an in-depth answer. Following from this, a Dow Jones report,  published early March 2011, stated that Siemens is targeting a reduction in operating costs and production overheads of euro 500 million by the end of 2011. As the focus on cost moves higher up board member’s agendas how does this impact your objectives over the next 12 months?

DH: Year-on-year savings have been the number one measure for the indirect organisation for the last two to three years and will remain so - tempered by looking at the specification and demand areas much more deeply.

It’s probably a little bit still short sighted in my opinion because the way that Siemens reports savings and generally across the Corporate environment it’s hard to make sure we can always see these hit bottom line. We, for instance in North West Europe, see a lot of investments going on in North West Europe- over €200 million of investment in 2011 in plants, buildings etc which consumes a large amount of resource, currently this does not contribute to the way Siemens measures its savings, however this area is key in supporting growth for the organisation. So balancing the cost reduction with managing future demand is a better way to look at this.

This outgoing cost is measured against the spend for the same period in the previous year.

However in terms of objectives. Siemens has always focused on reducing the indirect spend. A key focus for us is labour, and for those of us in the market know that when you start to grow again (which businesses are) that labour suddenly becomes a scarce commodity and trying to manage that in a different way is challenging because the businesses are driving for projects to be completed on time, to make sure that they can maximise any opportunity for profit by outperforming the customers expectations, then maybe having some additions added in towards the end of the project. That puts pressure on engineering resources in delivering the project to the required standard, this potentially goes against what the indirect group is trying to do in terms of scope and rate cards so the balancing and working with our stakeholders continue and the challenge goes on.

Talent management is another key focus area for the indirect organisation and Siemens at large. Our focus is on developing and finding talent, having mobile talent is important and will become more important because if we look at where the growth is, it may not be in the same place as we’ve historically had growth. Talent is one of SCM strategic objectives, Barbara Kux – Siemens board member, chairs our SCM board.

Managing talent is an interesting area for us because it’s about having the right talent, in the right place, same as having the right material, in the right place. So having an agile, flexible and mobile influx of talent is a key objective for the SCM organisation

It is in the entire SCM organisation’s personal objective, we have internal training agendas, development agendas as well as how we recruit and where we recruit from. Maybe not all of the procurement people that we recruit will come from the procurement community for instance. In the UK we are aiming to drive a closer link with the finance community and together we have formed joint graduate recruitment process where we bring in graduates over a two year period with six months spells alternating in procurement and in the finance community.

CG: In terms of objectives and KPIs, which are usually quantifiable in some way, how do you quantify education and staff development?

DH: Well it starts quite simply, by ensuring that the people you’ve got understand and follow our globally recognised operating policies. Next we ensure we have the right level of support through their line manager (maybe also with the support of a mentor) to frequently review and aid in development.

This can often be take for granted in many organisations! So we must ensure that basic talent identification and development is understood. If you don’t do that, you can’t go onto the next level. For example, one of my objectives is to have talent rotation, this involves looking at how to lure people from a different culture like the US or move one of my people from the UK to the US, or bring somebody from Austria into the North West area.

The other measure is satisfaction of the talent base (year-on-year). Again this is a base level measure, if you’ve got an organisation that ranks low in terms of it’s overall engagement and motivation within the organisation, that will reflect on the ability to develop that talent going forward because they’ll be less open and it will be an indication that organisation is not focusing on the topics that it probably should be.

We’re also now measuring movement within the Siemens corporation (we have the mechanisms to facilitate this) and that can be as simple as a two week assignment to potentially a three year assignment or a permanent move.

To support all of the above you need to develop and grow your people through mechanisms such as competency assessments, skill gap analysis and an open two way dialogue.

CG: How do you now communicate these objectives to the rest of your organisation, particularly the finance community?

DH: For the talent development, there’s three basic measures:

  • Engagement level of the employee base
  • Completion and adherence to the systematic elements of people management such as completing their dialogue for instance 
  • Round table monitoring of  key talent.

The finance community, the sales community, the engineering community etc all understand these standard measures as they are Siemens standards.

The flexibility / rotation measure is relatively easy to measure as it is a hard measure, a soft measure might include feedback from peers etc, they might assess the calibre of those  that they’re interfacing with.

So actually, one of the key measures is the feedback you get, a CFO in Siemens will tell you how person X did a great job and how person Y needs to work on something and we will agree joint development plans with those people. It’s therefore how you actually work with your stakeholders on a weekly, monthly basis. I know that sounds a rather simple as you can log and track the discussion as a development action.

In terms of our savings dashboard, it’s similar but I would argue that it’s not as globally well understood within Siemens so we, as the procurement organisation, need to sell the inherent value of what we do to gain that understanding.

Part of my role includes investments, when you consider investment, you instantly think beyond the year you’re in, you think three, five, ten years depending on the investment itself. It is fair to say organisations don’t always think of investment relative to people but actually it is no different to capital investment.

So, to summarise yes it is measurable, the finance community recognises the power of it especially as we are working together on all three items we just talked about.

Within the finance organisation it’s reasonably well understood. Is it as well understood in engineering, sales, project management? No it’s not but that is our challenge to change that.

CG: So through the talent management schemes you are making some headway into finance. However is there still some level of scepticism within the finance community about the numbers procurement brings to the table?

DH: In terms of savings, it’s a constant recalibration. We’re constantly engaging with the finance community and we are having regular stakeholder meetings with other parts of the business.

A saving might be attributable to one measure. A measure might be to look at the resourcing for administrative group in terms of temporary labour – again it’s about sharing what that means at a measurement level with the stakeholder. The approach varies across our different locations but ultimately we are getting our stakholders to recognise and agree together what we’re working on.

The umbrella metrics have been developed in which each individual business unit refers back to, so when we’re having the discussion at user level, we’re referring back to the overarching sourcing strategy. Over time you develop a consistency in the message that the finance community are hearing which is also delivered in a structured approach, as opposed to one-off or ad hoc updates, this has allowed the procurement community to start to build credibility and confidence and ultimately win-over the finance (and other) stakeholders.

We still have quite a bit of work to do though, I would be misleading you if I said that it’s done and we just get on and do it. The problem we’ve all got in new directives is that the savings are not absolute. If we saved €500 million, we could probably save €200m, €300m in absolute terms which as a consequence hit the bottom line but some of the other savings may fall into the grey area because the rates or demand have changed, or the spec of work has changed.

We also agree strategically, with the corporate heads, what we’re trying to achieve. We have a strategy and objective session once a year and we take a cross sample of stakeholders to come in to help define what it is that we’re driving towards over the next one to three years.

Overall it comes down to engagement, in some form or other. If I’m honest, now that we’ve started and the process is working, it’s easier with the finance community because we’ve got a common denominator which is the Euro cost.

Cost is not always a common denominator with other communities such as the engineering group or the HR group for example.

The most important part of engaging with each of the stakeholders is to be consistent, as I have said, so it’s not a fundamental shift each time you go and talk to them i.e. you don’t go and talk about something completely different each time.

CG: This is great insight. If we could, for a moment, take a step back and ask in your opinion, how do you define procurement?

DH: Procurement is the true business partner. Procurement is there to support making objectives business decisions that impact our third party spend. So it’s a business decision.

Procurement exists to advise the rest of the business partners (HR, IT, Legal etc) to make advanced decisions on how we (the business) spend cash.

CG: If I asked your CFO or your equivalent finance colleague to define procurement, would he define it the same way as you?

DH: Probably not quite, no. He probably would define procurement on the basis of cost reductions.

CG: Why doesn’t he see it the same way as yourself?

DH: Well it’s taken procurement communities the last few decades to start to recognise the strategic importance of itself. I would argue that ten years ago, the bulk of the procurement organisation didn’t talk too much outside the procurement function. Well certainly not as much as they do today.

I think we’ve only just got to the point where we understand ourselves, the value that procurement can deliver back to the business, and that probably means we’ve not spent the time walking the talk. We haven’t led by example in a consistent way, why would the community (and spend) that we’re trying to influence, see it that much different to what they’ve seen over the last ten years.

I think it’s where we are in the learning circle. There’s lots of things we can do, but I still think there’s even more work to do within the procurement organisation. The main area we’re looking at is to engage with the business better.

CG: Who is going to lead the charge in ensuring this business engagement happens positively?

DH: This change needs to happen within the procurement organisation. Fundamentally when you start to change the mindset within the procurement organisation, then you harness your whole procurement organisation and enable them to influence how they interface with the community that they’re dealing with.

The entire procurement community needs to understand where tomorrow’s value really is coming from and how they leverage their interfaces within the business to achieve that.

CG: How closely aligned are procurement and finance objectives?

DH: They’re interlinked because procurement’s objectives can be seen as a subset of finance’. There’s a close correlation, if you look at how the money is actually spent (the financing or payment models) which finance own, procurements role in that is the same as it is in HR and engineering. In my area, we’ve spent a lot of time with the finance community, looking at those payments and funding models and applying their expertise to our supply base.

I think that linkage instantly draws the benefits and how you measure and align what the procurement organisation is working on because if you start looking at those joint approaches, it’s easy to understand how the payment processes and nuances are handled from a finance perspective – in which procurement can start to talk a language finance is familiar with.

CG: We have talked quite a lot about how procurement impacts the internal organisation - which brings up the make vs buy argument. When the question of outsourcing comes up, do you think there’s a trend to outsource locally rather than looking offshore to low cost locations?

DH: Both. And in this situation we need a rounded procurement expert who can look at environmental factors such as sustainability, the green agenda, freight, capabilities, customer requirements etc and advise the business accurately.

So it’s definitely both depending on what the decision is - if you’re installing an offshore  platform which could take six months and could have 10’s of specialised engineers working on the project, you’re probably not going to buy those service in from India for say A North Sea installation.

If you look at manufacturing, and I think it depends at what point of the manufacturing process you are in, if you go right back to the source (taking electronics for example) of course you’re going to outsource to the lowest cost from a production perspective.

If you look at a wind turbine, moving a 60 metre lump of steal from China to the UK isn’t feasible on several levels – so our wind headquarters in Denmark has built a plant in China and the US and now we’re building a local plant in the UK (the UK is one of the biggest growth areas for wind in the next few years) – the procurement organisation was part of this decision making process.

CG: Interesting. Just wrapping up now, what is one thing that procurement teams in the UK, Europe and the world, should be doing to be seen as strategic indispensable part of any organisation?

DH: I would say that we need to intellectually and factually engage with our business partners to identify additional benefits that procurement can bring. Slightly less focus on cost and more on the engagement process with all functional business partners.

Proxima Group

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