In fiscal year 2019, the main task for Procurement was once again to safeguard supplies, and to help create competitive, innovative products and optimize cost structures. In addition, we continued to drive digitalized procurement processes forward.
The enhanced Group strategy TOGETHER 2025+ stands for more speed, focus and stringency, also within the Procurement division, and is driving faster change. The focus in 2019 was on implementing the concepts developed in the procurement strategy. Procurement’s key performance indicators were revised as part of a combined system of targets for Group Components and Procurement. Alongside the targets for material and investment costs and the timely award of contracts, the system of targets now gives greater weight to sustainability aspects and the achievement of carbon neutrality in the supply chain.
Target-costing strategies are becoming increasingly important in Procurement. They allow costs to be made transparent and concepts to be influenced in the early stage of product development by focusing on calculatory potentials. They also provide approaches for worldwide benchmarking and the exchange of best practices.
A cross-divisional strategic value chain management has been implemented to support profitable growth and safeguard the availability of hard- and software that is strategically relevant and/or crucial for ensuring supplies. Going forward, the newly formed committee for “Strategic Value Chain Management” will be responsible for taking strategically important “make”, “buy” or “partner” decisions.
The growing volume of software and the new partners and suppliers this entails necessitate adjustments to the process chain and Procurement’s award criteria. In future, the newly formed “Corporate Sourcing Committee Digital Car” will be in charge of the optimal award of contracts for vehicle and vehicle-related software. It will thereby create a key interface to the board-level management function with responsibility for Digital Car & Services, which was established at the Volkswagen Passenger Cars brand in 2019.
Volkswagen FAST – Supplier network as the basis for success
With the FAST (Future Automotive Supply Tracks) initiative, Group Procurement is instrumental in advancing the Volkswagen Group and its supply network with a view to partnerships and future-viability.
Thanks to the program, which was launched in 2015, Volkswagen was able to expand its portfolio of strategically important partners again in the reporting period. With the partners Microsoft, Infineon, Cree/Wolfspeed and AVL List, the priority in 2019 was above all on strengthening partnerships in the area of zero-emission and autonomous mobility.
FAST facilitates the regular exchange of information so that both sides are strongly positioned to cope with the future challenges facing the automotive industry. Based on a set of criteria, a comprehensive assessment of the previous year is disclosed to the suppliers so that improvements can be made together. Alongside the existing supply relationships, strategic agreements on globalization and innovation are still core issues of this exchange.
FAST partners are prioritized in the cross-divisional innovation process in that they are given the opportunity to present innovations to representatives from the Procurement and Technical development divisions at upper management level in strategy meetings. FAST partners are invited to attend relevant innovation events at which they can contribute their expertise. At the annual FAST Summit, talks were given on the strategic direction of e-mobility and a zero-emission future. The program will continue to be updated and refined in order to take full advantage of the potential from the FAST initiative.
A key task for Procurement is to safeguard supplies for the rapidly growing requirements of the e-mobility offensive through 2025 with a view to sustainability and optimizing cost structures in the process.
The adjustments to our organizational structures in Group Procurement are designed to let us focus on high-voltage batteries and e-resources. Through benchmarking and requirements-based training, we are increasing the purchasing expertise of our procurement organization in the area of the e-mobility offensive.
When awarding contracts to our e-mobility partners, we provide clear requirements in relation to sustainable supply sources, transparent, traceable supply streams, and energy- and carbon-optimized supply chains. We pool global demand from the European, American and Asian markets and award Group contracts with the goal of cost leadership for e-mobility solutions. To this end, we take steps to ensure diversification and localization of the supplier portfolio in an effort to reduce economic and geopolitical risks.
Digitalization of supply
We are working systematically to implement a completely digitalized supply chain. This is intended to help us to ensure supply and leverage synergies throughout the Group in order to take a leading position in terms of cost and innovation. We are therefore creating a shared database and using innovative technologies to enable efficient, networked collaboration in real time – both within the Group and with our partners. The objective of our functional area strategy for Procurement is to standardize transactions with our suppliers in the future and automate them where possible. This will not only reduce transaction costs but will also accelerate business processes. Potential supply risks can be reported automatically in order to identify measures and alternatives faster together. The cornerstone for the future of Procurement was laid in 2018 in the form of Group Procurement’s digitalization strategy. This strategy aims not only to eliminate the weaknesses of Procurement’s IT system environment but also to increase the organization’s effectiveness, efficiency and future viability.
Structure of key procurement markets
Our procurement process is organized at global level, with a presence in the key markets around the world. This ensures that production materials, investments in property, plant and equipment, and services can be procured worldwide to the quality required on the best possible terms. Networking of the brands’ procurement organizations enables us to leverage synergies across the Group in the various procurement markets.
In addition to the brands’ procurement units, the Volkswagen Group operates eight regional offices. In growth markets, we identify and train local suppliers to generate cost advantages for all Group production sites. We are also putting a focus on start-ups and software suppliers. In familiar and established markets, the regional offices support access to the latest technologies and innovations.
Supply situation for purchase parts and upstream materials
Systematic safeguarding of the supply of purchase parts is one of Procurement’s goals. Adverse effects on production in the Group caused by unforeseeable events such as natural disasters were minimized to the best of our ability.
Management of purchased parts and suppliers
Today’s market environment is characterized by persistent segmentation, diversification and globalization. We face these challenges with our purchased parts and supplier management, which supports and supervises the supplier processes. From development to series production, we focus on safeguarding the industrialization processes of the purchased parts at the individual supplier locations. The complexity of the components requires regular monitoring of manufacturing capacity. It is vital that we identify any disruptions at an early stage and take rapid action to remedy these. Close cooperation with the quality assurance units at the production sites is crucial for our vehicle projects by ensuring a stable supply of purchased parts to start-up and series production.
Sustainability in supplier relationships
Successful relationships with our business partners are based on observance of human rights, compliance with occupational health and safety standards, active environmental protection and combating corruption. These sustainability standards are defined in the contractually binding Volkswagen Group requirements for sustainability in relations with business partners (Code of Conduct for Business Partners). At the same time, the documents signed contain the expectation that any subsuppliers will be subject to the same obligation. We use the management system to review compliance with the requirements, which since 2019 has been an explicit condition for award of contract.
In our recently introduced sustainability rating we determine suppliers’ sustainability performance by means of self-disclosures and on-site audits. By the end of 2019, we had received 12,646 self-disclosures and the findings of 1,331 audits. As a rule, contracts are not awarded to suppliers who fail to comply with regulations or do not implement these adequately. Tying award decisions to sustainability criteria is one of the strongest levers for enforcing these. We address existing sustainability risks and violations of sustainability principles by systematically implementing measures; this also includes the upstream supply chain. Depending on the severity, these may entail the inclusion of stipulations and measures in performance specifications for suppliers. In connection with the introduction of the sustainability rating, we have once again stepped up our focus on advanced training for suppliers: in fiscal year 2019, around 1,100 suppliers in seven countries took advantage of the training programs.
Due to the Group’s transformation into a provider of sustainable mobility solutions, decarbonization and responsible raw material sourcing were two particularly important topics in 2019. Here we significantly expanded our activities in order to meet our own and external requirements. We systematically anchored the use of renewable energy in the specifications for battery suppliers and agreed measures to reduce CO2 emissions in a series of workshops with strategic suppliers. Our commitment to sustainability in connection with raw materials was equally emphatic. By focusing on battery raw materials and their potential adverse effects on people and the environment in the upstream chain, we significantly expanded our activities beyond our direct contractual partners. Key activities included the performance of audits, work with certified smelters and development of a sustainability standard for mines.
The basis for most of these measures is supply chain transparency. To increase this, we implemented a series of pilot projects in 2019 including blockchain projects for tracking individual supply chains and auditing critical subsuppliers at neuralgic points of high-risk supply chains. Worthy of note is the Responsible Sourcing Blockchain Network (RSBN), in which we, along with other large corporations, aim to track the cobalt supply chain and make it more sustainable.