Doosan Infracore

Construction Equipment

Month, 2010

Cost optimization despite low volumes and high variances

Alvaro Pacini – Vice President Sourcing & Supply Chain

2012-11-07

Page 1

AGENDA

1

2

3

4

Introduction Doosan Infracore Construction Equipment

The challenge: Increasing competitiveness in EMEA for

Doosan mini excavators

Cross functional cooperation between procurement, R&D and

production services

Doosan integrated cost - New approaches and their results

Page 2

Introduction Doosan Group

Page 3

Introduction Doosan Infracore Construction Equipment

Page 4

AGENDA

1

2

3

4

Introduction Doosan Infracore Construction Equipment

The challenge: Increasing competitiveness in EMEA for

Doosan mini excavators

Cross functional cooperation between procurement, R&D and

production services

Doosan integrated cost - New approaches and their results

Page 5

Construction Equipment Market and Trends – Global Market

0

5

10

15

20

25

30

35

40

45

50

55

60

65

70

75

80

85

90

95

100

105

110

750,000

850,000

950,000

0

2012 for

921,207

218,669

56,355

347,620

46,597

132,625

119,341

2011

1,023,912

240,810

54,063

434,100

47,085

124,399

123,455

2010

770,791

99,175

42,815

401,470

37,090

89,591

100,650

2009

686,950

212,512

28,582

253,306

29,310

76,855

86,385

250,000

350,000

150,000

450,000

50,000

650,000

550,000

1,050,000

REST OF WORLD units

INDIA units

CHINA units

JAPAN units

NORTH AMERICA units

EUROPE units

Industry Tot Value (buo USD)

Global Construction Equipment Market

Page 6

Construction Equipment Market and Trends – Global Market

Global Mini Excavator Market

106,845 (4.7 bio $)

89

35,900

14,100

11,906

33,840

2009

84,794 (3.7 bio $)

11,010

JAPAN

NORTH AMERICA

CHINA

REST OF WORLD

INDIA

2011

135,510 (5.9 bio $)

19,010

215

38,600

18,200

17,750

41,735

2010

11,469

73

22,250

11,200

10,000

29,802

EUROPE

2012 for

138,067 (6.1 bio $)

17,262

250

41,000

21,000

18,500

40,055

Page 7

Construction Equipment Market and Trends

Future Trends and Challenges

• In developing markets there will be a focus on energy and Infrastructure

• Much more focus on fuel consumption, parts availability, telematics for

fleet management (less machines for more work)

• Managing data will be key, i.e. Zero unplanned machine stops

• Intelligent machines: automation (or assistance) to avoid accidents and

optimize workflow

• Shift from machine selling to Solutions or Applications ($/ton, $/area,

$/km asphalted road…)

• Standardization towards cost reduction

• Chinese: Low cost & Low price and improving quality very fast

Page 8

AGENDA

1

2

3

4

Introduction Doosan Infracore Construction Equipment

The challenge: Increasing competitiveness in EMEA for

Doosan mini excavators

Cross functional cooperation between procurement, R&D and

production services

Doosan integrated cost - New approaches and their results

Page 9

Main objectives of the integrated cost reduction program are significant cost

reduction for current & new models and stabile design to value process

Current situation:

• The price pressure in the

construction equipment

business is getting tougher

• The customer market is

very volatile, especially

after the financial crisis

2008/9

• Compared to automotive

the construction equipment

business has relatively low

volumes and a large

number of variants

Objectives:

The integrated cost reduction (ICR)

initiative has a couple of objectives:

• Identification & implementation of cost

reduction ideas for current models

• Applying full potential in the new Model

• Robust cost tracking during the

development process

• Enhance Time to market

• Building a design to value process as

integrated part of the product

development process

• Education & know-how generation of

internal cost reduction team

Page 10

The deployment of a design to value process for Doosan will help to create

transparency and offers room for cost reduction in case of cost overrun

Gate 0 Gate 1 Gate 2 Gate 3 SOP

Cost transparency without design to value process

Cost transparency with design to value process

Opportunity to influence cost

Early cost transparency

offers room to implement

significant cost savings

In case of cost overrun

very limited room to

implement cost savings

Page 11

Cost efficiency is an integrated part of the product development process

Current product development process Proposed product development process

Simultaneous Engineering Team (SE-Team):

• Engineering

• Sourcing

• Manufacturing Engineering

• Marketing

• Quality

• Finance

• Aftermarket

• PMO

Simultaneous Engineering Team (SE-Team):

• Engineering

• Sourcing

• Manufacturing Engineering

• Marketing

• Quality

• Finance

• Aftermarket

• PMO

• Integrated Cost reduction

Timing

Function

Quality Timing

Function

Quality

Cost

efficiency

Page 12

AGENDA

1

2

3

4

Introduction Doosan Infracore Construction Equipment

The challenge: Increasing competitiveness in EMEA for

Doosan mini excavators

Cross functional cooperation between procurement, R&D and

production services

Doosan integrated cost - New approaches and their results

Page 13

We made a benchmark with two competitor machines and one

emerging market machine to generate a strong saving pipeline

1. Technical

optimization

2. Optimizing process

& supply chain 3. Commercial savings

Bobcat

E16 & E 26 Kubota KX 19-4 Doosan 27 Z

Focus Systems (wave 1 & Wave 2)

Detailed analysis with the defined tools &

methodologies for identification & implementation

of savings

Machine Benchmark

Workshop to get quick wins

and additional idea pipeline

Main focus on

• Future machines

• Some selected ideas for current machines

Main focus on

• Current machines

• Future machines

JCB 8018 CTS

Page 14

We selected 15 focus systems representing 50% of the addressable APV

Wave 1:

Control lever / Joystick

Control valves

Travel motor

Track rubber

Undercarriage parts

Frame machining turning

Swing casting & Machining

Wave 2:

Slew motor

Drive motor

Hydraulic hoses

Harness

Starter/Alternator

Controller

Seats

Muffler

Total Annual

Purchase

Volume (APV)

Not in

Focus

Proposed

Focus

systems

41 %

Addressable

APV

Not in

Scope

Spend Analysis E14/E16/E26 Proposed focus systems

100 % 18 %

82 %

41 %

- Engines

- Steel

APV= Annual Purchasing Volume

Page 15

The result of the benchmark and cost reduction activities

were savings for current and new models (target costing)

Supply

Chain

saving

Technical

saving

Target

current

model

Cost reduction for current model Target Costing for new model

Commercial

saving

Should

Cost

Current

Price

Content &

parameter

changes to

new model

Addition

al supply

chain

saving

Additional

technical

saving

Target

new

model

Should

Cost new

model

Baseline

current

model

Risk

Saving is

also possible

Page 16

Our approach for cost reduction is structured in 10 steps along

three phases and ensures fast saving generation & implementation

• Tear-down of selected focus systems (Bobcat & competitors)

Cost transparency

Internal cost reduction &

Issue workshop

Cost reduction work-

Shop with supplier

Evaluation of

savings potentials

Tear-down

Idea & action

documentation

• Should cost / Target cost for selected focus systems (current &

new)

• Comparison versus as-is cost and definition of commercial GAP

• Generation of cost reduction ideas and solving quality, logistic &

other critical issues

• Discuss the ideas & actions (cost reduction & issues) from the

internal workshop

• Create additional ideas

• Presentation of final documentation to workshop team

• Sign-off of results by team

• Evaluation and agreement of savings ideas and potentials with

the team

• Documentation and tracking of ideas (L1 – L5)

• As-is analysis of current supply chains & processes for focus

systems

• Identification of optimization areas (current & new)

Supply-chain & process

analysis

Implementation • Development of supplier strategy and definition of action plan

• Planning, delivery and follow-up of negotiations

• Consolidation of total cost information for systems,

• Prioritization of focus systems

Cost-driver analysis

and prioritization

1.

3.

5.

6.

4.

7

8.

9.

10

Quick Scan &

Prioritisation

Saving imple-

mentation

Saving

generation

• Analyzing quality, logistic and other critical issues Issue analysis

2

Phases Steps Content

Page 17

Example: The processes & supply chain have room for

improvements and the design is not optimized as a casting part

Levers for integrated cost reduction:

Process & supply chain optimization

Engineering redesign to reduce scrap rate &

manufacturing cost

Global sourcing to check the market

Page 18

Example: The scrap rate was ~25% and most processes were not

optimized yet

Main technical, process & supply chain savings:

Reduce scrap rate of 25%

Redesign casting (weight) according to

competitors

Reduce number of cores for the casting part

Reduce effort for grinding

Move grinding from machining to casting

supplier

Optimize machining time

Should cost

modelling

Internal & supplier

workshops

Process & supply

chain analysis

Negotiation

Page 19

Conclusion & Management summary

Despite the relatively low volumes and many variances, the

integrated cost reduction approach lead to significant commercial

& process/supply chain savings

Especially technical cost savings need to be identified and

implemented in an early stage of the product development process

to get a positive business case (Total cost of Ownership)

Platform & modularization strategy will increase volumes and

therefore purchasing power. This requires a sustainable product

development process with clear gateways and design freeze

Specification reviews based on benchmarks and supplier

workshops need to be verified with increased warranty cost

All cost reduction activities are a balance between effort and

expected benefit

Page 20

Thank you for your attention