Chapter 7 Case Studies
7.1 Bang & Olufsen A/S
The company’s founders Peter Boas Bang and Svend Andreas Grøn Olufsen met during their studies in the early 1920’s at Århus’ Electro Technical School, and quickly realized that they shared a common interest in radio technology. A few years after their studies, the two engineers met up again and after some initial experiments the company Bang & Olufsen a/s was founded on November 17th, 1925.
Growth & Crisis
Up to the Second World War the company grew steadily. The German occupation and the restrictions on imports were constraining the company, but these inconveniences were incomparable to the bombing and destruction of the factory on February 14-15th, 1945.
Construction drawings and models had been moved to safekeeping in private homes, and construction of a new factory started the following day. After the war sales increased rapidly as restrictions gradually were removed. During the 1950s the product portfolio grew to contain televisions, microphones and gramophones. Following the debate on joining the Common Market, Bang & Olufsen decided to direct its attention toward the European market.
At the same time, the product designs received massive criticism which ultimately led to the company’s renowned cooperation with famous designers. During the 1960’s the wide spread net of agents established previously was reduced, replacing agents by subsidiaries. The internationalization was supported by e.g. “The Seven CIC’s” (Corporate Identity Components) describing the company’s goals and personality. The 1970’s saw the introduction of “The Beocenter Group”, an initiative aiming at creating a dedicated, voluntary chain of specialty shops, more closely cooperating with Bang & Olufsen. In return for their loyalty and agreement to following certain design and layout instructions, the shops obtained a number of benefits. Amongst other dramatic changes, the customer focus was changed from the exclusive clique of Hi-Fi enthusiasts to all music lovers – a new and far larger target group. During the 1980’s competition from Asia threatened the company through declining loyalty from the distribution network and falling revenue (Groes, 1991). The company reacted too slowly to the crisis and the funds ran out. In the end, new funds had to be raised through a strategic alliance with Philips. Those funds quickly ran out as well.
New Management
In May 1991, the Board installed a new management team headed by Anders Knutsen. The first priority was to cut costs, and to do it quickly (Vestergård, 1992b). The plan “Break Point 1993” aimed at re-vitalizing B&O and securing its independence – and it was efficient. To minimize costs and increase flexibility stock keeping at the subsidiaries was eliminated, the production paradigm was changed from make-to-stock to make-to-order and the distribution strategy was changed to direct distribution. Staff was cut in the subsidiaries, central staff functions re-created, and a number of executives were laid off. Already in 1993 the company was making money, and the surplus was doubled the following year (Højbo, 1996). Further efficiencies were obtained through focused outsourcing. This extensive restructuring of the
logistics system earned the company the Danish Logistics Award in 19964. By 1997 the company had consolidated its earnings and was able to buy back the 25% of the shares sold to Philips in 1991, and by 1999 the company decided to focus on USA as the next big market for its products (Evert, 1999).
Financial Status
When Anders Knutsen in 2001 chose to resign as CEO, he handed over a company in good shape to his successor. The financial results in the last 2-3 years of his leadership were not as impressive is the first years at B&O, but this was primarily due to very large but essential investments (Bundgaard, 2001). When looking at the turnover, profit and number of employees for the past five years, it seems the turbulence has subsided, see Table 7-1 below.
Table 7-1: Financial Profile – Bang & Olufsen A/S5 End Date Turnover Profit Before Tax No. of Employees
2005-05-31 3.742.200 387.100 2.311
2004-05-31 3.612.700 340.500 2.717
2003-05-31 3.974.200 290.100 2.803
2002-05-31 4.212.000 225.600 2.908
2001-05-31 3.810.000 224.100 2.780
2000-05-31 3.722.400 316.800 2.783
Outsourcing Electronics
Following a series of organizational changes Bang & Olufsen sent out a press release on March 18, 2004, explaining how the electronics factory in Skive had been sold to Flextronics6, a supplier for more than 10 years. Ownership to buildings and equipment was to be completed by the end of the month at the same time as the employees were formally being transferred to their new employer. Bang & Olufsen had decided it was no longer in the electronics manufacturing industry, and had therefore decided to let others manage these activities7. In the press release John Bennett-Therkildsen (Director, Operations - Bang &
Olufsen) explains:
“In today’s competitive global marketplace, we see the need to work closely with a company like Flextronics because we believe that by using their world-class EMS [electronic manufacturing services] capabilities, they will be able to help us fulfill our objective in strengthening the profitability and agility of our company, and in addition, we believe that this is a great way of ensuring long-term survival of the electronics factory in Skive. For these reasons, transferring the factory to Flextronics makes obvious strategic sense.”
4 For more info, please see www.logistikkonferencen.dk.
5 Figures in thousands DKK.
6 For more info, please see www.flextronics.com.
7 The activities taken over by Flextronics represent approx. 65% of the value of electronics components used by Bang & Olufsen. Another 15-20% is supplied by a long term partner in Malaysia. The remaining 10-15% is supplied by various suppliers, as special competencies/technologies are required.
As part of the overall transaction the two companies entered into a five-year manufacturing agreement with projected annual value of DKK 510 million. To Flextronics, taking over the factory in Skive is quite an opportunity. In the press release Mike McNamara (Chief Operating Officer – Flextronics) is quoted:
“We believe this long term agreement makes both strategic and financial sense as it builds on a long-standing relationship between the two companies. … Additionally, this provides Flextronics with a potential opportunity to expand our business relationship by increasing our service offering to Bang & Olufsen and other Danish companies. From a financial standpoint, it makes sense because we receive a long-term manufacturing agreement with all of the required contractual protections for acquiring a facility from a customer while providing us with our required return on invested capital and an operating margin in excess of our expected EMS average because of the complexity of the product build.”
The uniqueness of the competencies at the factory is well recognized, in the press release Peter Thostrup (Executive Vice President - Bang & Olufsen) states:
“It is, of course, an important decision to transfer a factory like Skive. The factory possesses unique competencies as well as dedicated employees who have served Bang & Olufsen for many years. However, we believe the partnership with Flextronics will provide the factory with the best possible opportunities to retain and enhance its competitiveness.”
The outsourcing of this vital part of the manufacturing process is thereby done with the full recognition of the magnitude of change. The core competence of the company is no longer the manufacture of cutting edge products, Steen B. Jørgensen (Director, Logistics - Bang &
Olufsen):
“We are no longer a manufacturing firm, in the old sense of the word. Our core competence is treatment of aluminum surfaces – a competence which is unchallenged in the world. … In reality, for a long period of time we were in a market where we could not compete, we produce in way too small batch sizes to ever obtain economies of scale.”
More or less at the same time as the transfer of the electronics factory, a part of the assembly of mechanical parts was moved to a newly created factory in Slovakia.
Product Portfolio
Where the operations thereby have been simplified, the product portfolio has been extended.
Today the product range covers music systems, televisions, loudspeakers, as well as telephones and IT-related products (e.g. BeoPlayer™ and BeoLink PC2™). Furthermore Bang & Olufsen has diversified into related business areas like ICEpower8 (design and manufacture of amplification and modulation components) and unrelated like Bang & Olufsen Medicom9 (compliance devices like tablet dispensers, inhalers, injection systems etc.) (Erhardtsen, 2000). Furthermore existing products are being applied in new contexts as Bang
& Olufsen recently entered the luxury yacht installation business, and entered into
8 For more info, please see www.icepower.bang-olufsen.com.
9 For more info, please see www.medicom.bang-olufsen.com.
partnerships with car manufacturers like Ferrari and Audi. The latter example actually draws on the competence of the related diversification as ICEpower technology is used in producing the components for the audio solution for the Audi A8.
Organization
Figure 7-1: Organization Chart – Bang & Olufsen Group10
Assembly (L. Jørgensen)
Finance/Accounting Randi Toftlund Staff Functions
Peter Thostrup
New Business Development Torben B. Sørensen
Innovation Torben B. Sørensen Product Development
Peter Eckhardt Marketing & Communication
Jakob Odgaard
Operations John Bennett-Therkildsen
National Sales Offices Torben B. Sørensen & Peter Thostrup
Non Branded Business Peter Thostrup & Torben B. Sørensen
Marketing (Ole Primdahl) Retail (Hinrich Cordts)
PR, Int’l Communications & Int’l Press Office (Thomas Reil)
Scandinavia (L. K. Andersen) Central Europe (P. Dalm) UK-Benelux (D. Mottershead)
France/Spain (A. De Lucio) Italy (F. Canale) USA (K. Gravesen)
Asia/Pacific (L. Myrup) Expansion Markets (J. Odgaard)
Product Mgmt. (L. Flyvholm) Projects (J. T. Gylling) Platforms (J. Aaberg)
Projects (F. S. Koster) Methods (A. K. Erlandsen) Quality Mgmt. (M. Røn)
Tech. & Innovation (H. Messell)
Automotive (F. M. Pedersen) Enterprise (J. Odgaard) BeoLiving (A. De Lucio)
Medicom (H. Kagenow) ICEpower (P. Søjberg & K. Nielsen) IT (P. M. Larsen)
Quality/Environ. (J. T. Tækker) Legal (K. B. Hansen)
HR-M/HR-D (N. M. Thorsted & A. L. Sennels) Corp. After Sales Service (S. M. Graugaard) Finance (A-M. Jensen)
Accounting (J. Vittrup)
Facilities (K. N. Andersen & P. Y. Larsen)
Idealand (E. Thomsen) Idealab (P. Petersen) Purchasing (L. H. Galsgaard) Logistics (S. B. Jørgensen) Quality (C. Møller)
Mechanics (F. M. Pedersen) Customer Centre (K. D. Kattenhøj) Bang & Olufsen SRO (M. L. Jensen)
Management
Torben B. Sørensen (CEO) & Peter Thostrup (VP)
Bang & Olufsen Group
Functions / areas of responsibilities Not legal structure
Still based in Struer, the organization shows a strong commitment to innovation as the company has not only a department for Product Development, but also for Innovation, and New Business Development, the latter two being under the direct management of Torben B.
Sørensen (CEO) (see Figure 7-1 above).
Purchasing, Logistics, Assembly, Customer Service etc. are co-located under Operations, whereas Sales is placed under National Sales Offices and Marketing is co-organized with Communication. The Slovak plant is placed under Operations.
10 Source: Peter S. Hune, Bang & Olufsen.
Supplier Management
With the reconfiguration of the company and the outsourcing of activities came a need to radically reduce the supplier base.
Figure 7-2: Bang & Olufsen's Supplier Segmentation Model11
KEY SUPPLIER SYSTEM SUPPLIER
STANDARD SUPPLIER CAPACITY SUPPLIER Product characteristics:
– Technologically complex products with complex interfaces (OEM products)
– Technological development can not easily be influenced
Market characteristics:
– Market-driven component development and price – Concentrated market with few established players
Supplier characteristics:
– Large companies and few alternatives – B&O is a very small customer
Competence characteristics:
– Supply interface
– Technological competence – Absorption competence
Product characteristics:
– B&O specified items
– Complex supply (in terms of production or management)
Market characteristics:
– Development is driven by B&O’s requirements.
Ideally by several similar customers
– Few/no alternative suppliers when the supplier is chosen for a task
Supplier characteristics:
– B&O accounts for a large proportion of the supplier’s turnover
– Typically relatively small companies Competence characteristics:
– Integrative interface – Relationship competence – Joint development competence
Product characteristics:
– Technological products but with simple interfaces – Highly standardised products and services – Low engineer input and expertise required Market characteristics:
– Stiff competition on the market – Several suppliers able to supply
Supplier characteristics:
– Low switching costs – Low negotiation power
Competence characteristics:
– Simple interface – Production competence – Flexibility competence
Product characteristics:
– Standard process with well-defined interfaces – B&O-specified items where the process is
market-driven
Market characteristics:
– The price is determined by cost
– B&O often accounts for a small proportion of the supplier’s turnover
Supplier characteristics:
– Large or small companies, but several suppliers – Low negotiation power
– High dependence on B&O Competence characteristics:
– Transfer interface – Flexibility competence
– Know-how transfer competence – Transfer of process know-how B
S
S B S B
When interviewed in 2004 Klaus K. Knudsen (Director, Purchasing) explained:
“Earlier suppliers were often selected by developers based on either a need for a very specific component, or due to the product developers preferences, he might have worked with the supplier in a previous job. There were no incentives to reduce the supplier base, so it just kept growing. … At the time I
11 Source: Bang & Olufsen. See also Møller (2003).
started in this job, the purchasing department had lost control over the supplier portfolio, and we needed to get an overview.”12
A supplier segmentation model was put in place in 2001, categorizing the suppliers based on the investments made by the supplier and Bang & Olufsen, see Figure 7-2 above. The horizontal axis in the model represents the suppliers’ investment, the vertical B&O’s investment. Standard suppliers are thereby suppliers of commodities where neither the supplier nor B&O make specific investments. Conversely, System suppliers deliver B&O specified complex components or sub-systems based on investments on both parties. Besides the investment categories, each cell has a number of distinct characteristics on Product, Market, Supplier, and Competence13. Each supplier belong to one of the categories in the model above – and for each supplier the four stakeholders Supply, Quality, Cost, and Technology14 must work together to ensure an optimal sourcing solution.
Before the segmentation model the purchasing department perceived almost all suppliers as either Key or System suppliers, but the analysis revealed the opposite was the case. Most suppliers were either Standard or Capacity suppliers, and it was realized that resources had been spent on building and sustaining relationships with the wrong suppliers. Having fewer than expected Systems or Key suppliers in the portfolio was a pleasant surprise, though, Klaus K. Knudsen comments:
“When relying on an external partner you trade off control for cost. … We have had Systems suppliers for many years, so we are used to living with the uncertainty. Within the last couple of years, we’ve ‘survived’ two fires at our suppliers, and one bankruptcy – you really validate if procedures are in place when these things happen.”
Relying on e.g. Philips for components for a number of important products does not seem to constitute a problem:
“We rely on Philips to supply these critical components, but there’s no alternative. We might choose another supplier but then we probably would have to redesign our product. But when we look for components for a new product we obviously try to avoid introducing new sole/single suppliers to the supplier base. We try to minimize the number of suppliers in the top two cells of the model”.
The model was subsequently modified several times, and is today the fundamental framework for supplier management at Bang & Olufsen.
12 According to Helbo, Jakobsen, & Gammelgaard (2004) Bang & Olufsen in 1993 had 1000 suppliers of direct inputs. Today the company has less than 300.
13 Confronted with the possibility that the characteristics of a supplier “not fitting” the model, Klaus Knudsen comments that it is quite rare the characteristics point towards more than one cell. In his experience the product characteristics leads to the Market, Suppler, and Competence characteristics, at least in the medium to long run.
14 The four stakeholders translate into the following departments: Supply = Logistics (Operations), Quality = Quality (Operations), Cost = Purchasing (Operations), and Technology = Technology & Innovation (Product Development), see Figure 7-1.
Sourcing Strategy
When describing the sourcing strategy, Peter S. Hune (Senior Manager, Purchasing) makes direct reference to the segmentation model:
“We believe we should always have a readily accessible alternative source for input from Standard and Capacity suppliers. When we are dealing with Key and System suppliers we are often dealing with either single or sole sourcing, and in this area we are currently changing attitude. Whereas we earlier were reluctant to change supplier we are now working on altering our procedures to perform a thorough performance evaluation and supplier selection prior to putting any product in production. By doing so, we hope to reduce dependency to one supplier – and to not put ‘all our eggs in one basket’.”
Continued Outsourcing
Albeit the intent is to minimize the number of supplier in the top two cells of the segmentation model, the current trend is to outsource more and more complex tasks/components, unavoidably creating further dependencies. The shift is primarily taking place from the Capacity supplier segment to the System supplier segment, outsourcing B&O specific items. The intent of this continued outsourcing is to simplify internal operations as System suppliers are expected to manage their own supply chains, Peter S. Hune:
“By shifting from Capacity suppliers to System suppliers we end up with less inventory as System suppliers are expected to manage their own supply chain.
… We really have no choice but to outsource more, as the number of variants is increasing.”
Peter S. Hune goes on to explain how the spare parts guarantee varies from product group to product group, and how the burden of keeping stock for the spare parts guarantee is shifted to the supplier when possible. He foresees further outsourcing changing the current status of the supplier base (18 Key suppliers, 17 System suppliers, 115 Standard suppliers, and 132 Capacity suppliers). So, relying on single or sole suppliers are more or less “the rules of the game” to Bang & Olufsen, putting pressure on the Purchasing department to ensure stability in input at the same time as cost must be kept under control.
Inventory Management
One way of dealing with these uncertainties is of course to build inventory, but as input gets more and more complex the value of the inventory increases dramatically. Therefore the use of inventory as a means to handle uncertainty is less of an option for Bang & Olufsen than for other companies15. If Bang & Olufsen for instance had the possibility to implement modularity in their products to any extent, the inventory costs might be more reasonable. But since this is not an option, Bang & Olufsen more and more often asks the suppliers to hold this stock.
15 The use of inventory as a means of insurance has a special meaning at Bang & Olufsen as they offer a 12 years spare parts guarantee. Previously when a product was taken out of the product portfolio, spare parts were bought from suppliers and stored in special containers. Today, Bang & Olufsen has differentiated the spare parts guarantee by product class, and tries to persuade suppliers to hold this inventory.
Supplier Evaluation
To ensure this inventory is managed in a reasonably manner, and to ensure stable production, potential suppliers are visited and evaluated according to a framework (see Figure 7-3 below).
Figure 7-3: Bang & Olufsen’s Basic Risk Assessment Questions16
Risk Assesment of suppliers
Questions:
1. Does the company have a Risk Management function with delegated responsibility?
2. Does the company have a Risk Report?
Production area
3. Are the production areas divided into independent fire sections?
4. Has an automatic fire alarm with transmission to the fire brigade been installed?
5. Has an automatic fire ventilation been installed in the roof?
6. Is there a doubling of important production equipment?
7. Are identical production lines (or lines which can be readjusted) placed in several independent fire sections or on other adresses?
8. Are the tools that are not in use placed in an independent fire section?
9. Are there any external production possibilities or another producer with whom an agreement has been made about mutual assistance in case of loss of production capacity?
Stocks
10. Does the stocks constitute any independent fire sections?
11. Has an automatic fire alarm with transmission to the fire brigade been installed?
12. Has an automatic water sprinkling system with alarm transmission to the fire brigade been installed?
13. Has an automatic fire ventilation been installed in the roof?
14. Have the stock been physically secured against theft and with alarm to a protection acency?
15. Has the company carried out a corresponding analysis of its own suppliers, and what was the result of the analysis?
Consequence of stop in business operation
16. If the worst thinkable damage occurs in your company, including failure of any possible precautionary measures, how long time will it take before you are capable of supplying to the full extent?
17. Has a minimum stock been build up?
If yes, how long time will it cover?
Where is the storehouse situated in proportion to the production area?
Has this been included in your answer to item 16?
03.06.02/PDA
The framework was developed by Kim B. Hansen (Legal Council):
“The framework is the result of years of work, albeit it is still a ‘work in progress’. The intent is to map out the problem areas, primarily in inventory management and production. … Actually the framework was developed for
16 Source: Bang & Olufsen.
use in our own plants as this was my primary responsibility earlier, but it obviously has relevance for dealing with suppliers as well.”
When interviewed in 2004, Klaus K. Knudsen and Peter S. Hune explained how the risk assessment has relevance in supplier management:
“The questionnaire is used to identify problem areas, and to assess the severity of the problems. At this time we have not integrated this tool in the segmentation model, but we routinely visit the suppliers. The original questionnaire was developed further to include e.g. questions on the suppliers practice on Risk Management.”
When interviewed in 2005, Peter S. Hune explains how the framework is used primarily upon supplier selection:
“The yearly evaluation is basically a desk job – we do not have to go and visit the suppliers. But for some of the most critical supplier we go anyway, and in that case we naturally use the framework as a tool…”
Albeit not used systematically in the purchasing department the questionnaire does add value when discussing potential for improvement with suppliers.
Measuring Severity
The measure of severity is the same internally as externally, days of interruption, but besides the benefit of knowing the risk exposure and using that to direct attention and enforce changes, there’s another, more directly measurable impact of performing the supplier certifications, Kim B. Hansen:
“When we visit critical suppliers, we often go together with representatives from our insurance company. The consequence of implementing corrective measures and negotiating changes to routines at the suppliers’ is a reduction in insurance premium – the ‘safer’ suppliers we have and the better we know them, the lower the cost of insurance.”
Identifying the critical suppliers is therefore an important task, which is done in a procedure containing several steps:
1. First the product portfolio is analyzed to find the products contributing most to turnover.
2. Then suppliers to these products are identified, and the inputs are analyzed to create a list of non-commodity items.
3. From this list each supplier is evaluated to find out time required to redesign the finished product or to find an alternative solution.
4. Finally an impact value is put on each supplier and the suppliers are ranked, creating a prioritized list of suppliers (and critical items).
Having identified the critical suppliers, the before mentioned questionnaire (shown above in Figure 7-3) can be applied.
Being a Small Customer
But not all suppliers volunteer their participation in these assessment schemes, Klaus K.
Knudsen comments: