722A29 Modul: Inköp & FörsäljningABB, FG Wilson and Caterpillar IEI, Linköpings Universitet Jakob Rehme Björn Oskarsson THE ABB, FG WILSON AND CATERPILLAR CASE ABB – BUSINESS AREA IPS -­‐ 1999 ABB’s business area Industrial Products and Systems, or IPS, consisted in 1999 of some 60 production units in 35 countries. ABB IPS consisted of two parts with one part producing and selling standard products for the low-­‐voltage market (i.e. up to ca 1000V), and one part producing and selling low voltage systems, such as cabinets and low voltage switchgears. The market size was estimated to around 25 BUSD, where the industrialised part of the world has a size of approximately 17 BUSD (1999). The market for ABB IPS was separated into two segments. One was for large customers with their own production; often divisions of very large international corporations. These large customers, of which many are so called OEMs1, were thus supplied directly. The other segment was small customers, such as local installers or industries, who subsequently were supplied via wholesalers (see Figure 1). W holesaler marketing channel
Installers
Producer
Sm all Industry/
farm ers/DIY
W holesaler
Industry/ end
user/
Direct marketing channel
OEM/
Large industry
Figure 1. The direct and indirect marketing channels
The main reason for direct selling to OEMs is their reluctance to buy via wholesalers. Furthermore, these fairly large companies, more often than not have got the required technical competence to handle this direct type of purchasing. The OEM’s purchase volumes are so high, that a direct supply is economically sound. What was clear in the standard product business of ABB IPS (hereafter referred to as simply ABB) is that the aim was to focus on large customers, thus avoiding small orders. Therefore, there is a strategy in many countries to increase the percentage sold to wholesalers, as well as to focus on the larger OEM customers. 1
OEM means Original Equipment Manufacturer. There is however no “one definition” of an OEM. In
this case it refers to a company putting components together into a complete system or solution.
1 722A29 Modul: Inköp & FörsäljningABB, FG Wilson and Caterpillar IEI, Linköpings Universitet Jakob Rehme Björn Oskarsson Developments in the Market In the ABB world there are a number of market trends that set the framework for the workings of the selling organisations, and the way in which the management want the future organisation to work. One of the strongest points for the sales of standard products is the customer demand for common pricing in large regions. Moreover, the consolidation frenzy has made customers even more aware of the differences in price levels for products and components in different parts of the world, resulting in demands for global pricing strategies. The customer group wholesalers are also becoming fewer and more regional, thus adding to their strength as individual customers. This development means also that the wholesalers are taking over a lot of logistics responsibility, which formerly was handled by manufacturers. In the same manner the competition is also being consolidated, so that the competitors are becoming larger, whereas many of the smaller local companies are being acquired. There are also trends that are more intangible but nevertheless considered important for the ABB selling organisation. Examples of such trends, which are experienced by ABB, are that the customers’ demands and expectations are turning towards requirements for more competence and value solutions, and that customer service becomes more important for competitiveness. This development is well in line with the consolidation of customers. These now large companies want to be treated as individuals who wants tailor-­‐made solutions, instead of being the subject of a mass-­‐market offerings. THE ABB SALES VISION -­‐ 1999 The standard products business for ABB is very much a volume business, where the number of products produced is important for reaching economies of scale. Since volume is so important for ABB, especially for the production companies, it is not enough to be strong on just a few markets. Instead the business is viewed in an international perspective. ABB has therefore a vision to become one of the two world leading companies in their area. In order to become that, the ABB organisation needs to grow faster than their competitors. A strong belief in ABB is that one of the major determining factors for achieving this growth is to excel in sales and marketing work, whereas having an outstanding product range is almost seen as purely a qualifier. The Sales coordination effort Within ABB there have been a number of efforts to try to coordinate the offerings towards specific customers and customer groups. In 1999, the management regarded as especially important to have control of all the sales related coordination work that was carried out between different companies in the Business Area. Therefore, a marketing director for the whole business area was appointed, with the task to start up new initiatives for the promotion of the selling organisations. One of the first tasks of the marketing director was to define some different types of initiatives. One of these was the constellation of an OEM and wholesale Key Account Management programme, with one person assigned responsible for the coordination of the many accounts in the organisation. The selling organisations had noticed a clear shift in the customers’ buying behaviour, where customers had started to rely on their suppliers for more application knowledge. Market segmentation, and the exchange of segment application knowledge between 2 722A29 Modul: Inköp & FörsäljningABB, FG Wilson and Caterpillar IEI, Linköpings Universitet Jakob Rehme Björn Oskarsson sales companies was therefore seen as a way to be at the cutting edge of customer requirements, and to supply what the customer was actually looking for. One element that was regarded as vital to be successful in the marketplace was therefore to be able to recognise and cater for the individual needs of the different segments. The strategy was to get an in-­‐depth understanding of customers’ needs and how ABB could help these customers to become more competitive by using ABB products and systems. The focus was to strengthen relationships with customers. In particular there were a few selected key OEM segments with which ABB wanted to become the “number one supplier”. International Customer Coordination and the Key Account Management Programme The ABB organisation had several coordination groups especially aimed at coordinating efforts for international customers, as a way to try to win these large accounts. In 1998 different key account projects were combined into a common key account organisation for both distributors and OEMs. Whereas market segmentation was a way to understand the needs of different customer groups, key account management was a way of paying special attention to large customers and their specific needs. However, the major determinant for ABB to coordinate sales activities was from the beginning to achieve door openers into customers with operations in different geographical markets and to benefit from benchmarking within different application segments. Each key account had one international Key Account Manager (KAM) responsible for the ABB contacts towards the whole customer organisation. In each country where the customer had local presence, ABB assigned one national KAM. The national KAMs were responsible to cater for the day-­‐to-­‐day needs of the customer business, as well as keeping track on movements and activities that might have changed the way in which the customer wanted to do business. Furthermore, whereas the international KAM was responsible for the strategic partnership and thus agreements, the national KAM were responsible for the local partnership agreements. Furthermore, the majority of KAMs had more than one assigned key account both nationally and internationally. Some of the account managers had the KAM work merely as a part time assignment whereas some others were fully occupied by the key account management work. F.G. WILSON – THE CUSTOMER F.G. Wilson is a generator-­‐set manufacturer established in 1966 in Belfast, Northern Ireland. Since the early 70’s the company has now grown into an international organisation with 10 subsidiaries with presence in some 170 countries. The group’s headquarters are now located in Larne, Northern Ireland, with production facilities for the assembly of diesel powered generating sets, with some 30,000 generating sets produced per year (sales approx. 375 MUSD 1997). Two additional plants in Northern Ireland are handling sheet metal fabrication and the manufacture of control systems. They are the biggest generator-­‐set manufacturer in Europe, and one of the top-­‐three diesel generator-­‐set manufacturers in the world. 3 722A29 Modul: Inköp & FörsäljningABB, FG Wilson and Caterpillar IEI, Linköpings Universitet Jakob Rehme Björn Oskarsson In 1994, the company was acquired by the multinational Emerson Electric Group. Shortly thereafter in 1996, Caterpillar invested money in a joint venture with Emerson. The joint venture meant that F.G. Wilson was to assemble most of Caterpillar's generating set range for the European market. In June 1999, Caterpillar acquired 100% equity in F.G. Wilson. Caterpillar engines and generating sets account for some 4 billion USD or around 20% of the total turnover for the company, meaning that the F.G. Wilson organisation has a good fit with operations in Caterpillar, who has manufacturing plants in a number of European countries. F.G. Wilson is now an integral part of the Caterpillar group and functions as the principal manufacturing plant for Caterpillar generating sets sold outside the US. Generating sets are predominantly used by industry, hospitals and commercial buildings that need uninterrupted power2 for their operations to run in case of power failures. Another area of use is where there is difficulty in finding other power sources such as road construction works. Furthermore, in many parts of the developing world generating sets are the only source of electricity. The Initiation of ABB´s F.G. Wilson KAM The initiation of this KAM had a fairly long history. Already in 1994 F.G. Wilson was defined as a key customer for the business area. Also prior to this F.G. Wilson had business dealings with the ABB organisation, and they had been buying products on a minor scale since 1988. In 1993 ABB tried to make a competitive bid to supply a range of circuit breakers, thus replacing the then current brand. However, the contract was signed with yet another competitor for their complete package of products. The real initiation of the F.G. Wilson KAM work commenced after they had been recognised as a potential key customer. In this work, manufacturer involvement was seen as highly important. The work particularly involved customer visits to understand customer needs and to adjust the product offer to meet these. Furthermore, product modifications were on the agenda, in particular for circuit breakers. The customer organisation had previously made their purchases from a competitor that sold components from England, but via a local agent in Northern Ireland. The competitor had shown somewhat mild interest in the business although the volumes were high. They controlled the business from the UK and regarded the customer as an order “giver”, and acted themselves as order receivers. Prior to the ABB interest the company had never got any sales calls from the competitor organisation’s production company. However, when the word got out that ABB was calling on F.G. Wilson, many VIP’s from the competitor organisation were flown in to meet the customer. The first meetings with the customer concluded that he was willing to switch to another supplier, especially as he felt that he had the ear of the production companies in ABB. Since the customer was not spoiled by many sales calls from competing producers, he was impressed by the attention he received, and came to have a very positive attitude towards the sales efforts from ABB. Although F.G. Wilson then was a part of Emerson, a multinational corporation, the main business was up until then handled on a fairly local 2
The generator set segment is also referred to as Uninterrupted Power Supply (UPS) for standby or
emergency power.
4 722A29 Modul: Inköp & FörsäljningABB, FG Wilson and Caterpillar IEI, Linköpings Universitet Jakob Rehme Björn Oskarsson basis, where trust and reliability were important ingredients in relationship development. The Organisation of the F.G. Wilson KAM Whereas the organisation of the initial KAM was aimed at the Irish organisation, it was soon extended into a more internationally inclined organisation. This organisation was solely orientated towards sales opportunities based on local sales to the same customer, thus trying to establish sales relations based on relationship piggybacking copied from the Irish organisation. A predominant feature in this KAM organisation was that the international KAM came from a production company. A large part of the organisation handled issues that were directly related to the manufacturers, whereas they needed to be involved in direct discussions with the customer. This “organisation” was contingency-­‐based, formed for problem resolution, and consisted of manufacturer personnel dedicated to commercial and technical issues. The organisation that was formed for the F.G. Wilson organisation was primarily designed so that there was one ABB contact point for a fairly comprehensive offer. For problem resolution with producing companies, both for establishing the customer relationship and developing it, more personal contacts were used internally. The Work with the F.G. Wilson KAM Whereas the initial contacts with the customer entailed customer visits and keenly listening to and evaluating customer needs, the next step in the KAM work consisted of opening up the ABB organisation to the customer. The predominant coordination work for this customer was centred on two basic issues. One was the technical issue of how the ABB components would work in the F.G. Wilson control system. The other issue was the commercial part, where the ABB organisation needed to present a competitive offer towards the F.G. Wilson organisation in order for the customer to judge it fruitful to switch over to ABB. Switching over to a new brand more often than not involves comprehensive technical activity, redoing drawings and technical specifications, which is time consuming and therefore somewhat costly. In order to avoid this switching cost obstacle, the ABB organisation offered support in the change-­‐over, hence contributing to lowering costs and covering some expenses. The major part of the initial work was handled jointly between the appointed Swedish key account manager and members of the Irish sales organisation, and consisted primarily of learning the customer requirements and simultaneously developing the relationship to achieve trust. The first meetings were primarily concerned with the awareness part, so that the customer organisation could fully evaluate the ABB offer. One of the stronger selling points from the ABB organisation was the direct contact the relationship created thus ensuring a commitment from the ABB organisation. The normal way of doing business was otherwise to have the sales organisation acting as an intermediary and buffer between customer and producer. To pinpoint F.G. Wilson as a key customer was therefore a selling point in itself. One of the major difficulties for ABB’s selling organisation was to coordinate the different producers within the group in order to create a competitive offer. The key customer approach worked as a facilitator for this, in as much as the goal for the participants was very clear in terms of volumes and prices, which was relayed back to the producers. Still one of the largest issues for the ABB organisation was to coordinate between the producers and the local sales company in order to be able to make a 5 722A29 Modul: Inköp & FörsäljningABB, FG Wilson and Caterpillar IEI, Linköpings Universitet Jakob Rehme Björn Oskarsson competitive offer to the customer. These negotiations were not always clear-­‐cut since, more often than not, there are certain organisational entities that benefit more from a specific agreement than others. In the case of F.G. Wilson the leverage for the manufacturers was large enough, and the volumes that the F.G. Wilson organisation required were substantial so the issue was resolved (under the circumstances) “fairly quickly”. By that time the volume was increasing at an average of 20 % per year, which accentuated the interest from the producers. The F.G. Wilson account started off as a single national account for Northern Ireland. However, with the acquisition by Caterpillar, to the customer organisation were added a number of manufacturing plants in the US with no prior ABB involvement. Technical and commercial issues are in many cases intertwined, particularly when there is need for technical adaptations in order to reach customer requirements. The ABB organisation trained F.G. Wilson employees in the use of ABB equipment. Commercially the agreement was made in two basic steps. The first step was the conceptual phase where the basic assumptions and layout of the deal were presented. The second step was the more “real” commercial agreement with prices and terms, negotiations which required more active participation by the manufacturers, and consequently with more people involved. This step also contained a lot of the social relationship creation, and was a way for ABB to show its commitment to the customer. One of the strongest selling points for the ABB organisation was subsequently the dedication from the production companies and the social relationships that thus were created. This was something that the F.G. Wilson organisation was fairly unacquainted with, at least for these types of products. Obviously the commercial aspects were also of the utmost importance, but the social relationship that the ABB organisation built up also meant that the F.G. Wilson organisation felt security both on the technical side and on the logistics side. The manufacturers opened up their facilities to the customer for a full inspection. Logistically most of the deal was centred on the local sales organisation for the coordination of deliveries as well as the support function. The deliveries, however, were for a relatively narrow product range with relatively few dimensions. In the agreement the ABB organisation complied by guaranteeing consistent and reliable deliveries where stock-­‐outs would be severely penalised. The KAM -­‐ F.G. Wilson -­‐ Relationship The technical interdependence in the F.G. Wilson case was relatively strong, and very much related to the commercial deal. The ABB manufacturers’ products encompassed the function of switching currents. The commercial adjustment in order to meet customer requirements was significant, and required substantial coordination between the manufacturers and the local Irish sales organisation. Particularly the international KAM was reliant on the manufacturers for the provision of a joint offer towards the customer. Although the sales dependence was a concern for the manufacturers, the Irish organisation was totally dependent of the production companies’ agreements. Customer relationship building was extensive particularly in the early phases. Since the number of participants was fairly low, this included face-­‐to-­‐face interactions with the customer. Information was also distributed via e-­‐mail, although personal contact was regarded as an imperative, and was therefore focused. Both parties regarded the resulting relationship as very good and mutually beneficial. The key account management task was almost exclusively devoted to relationship 6 722A29 Modul: Inköp & FörsäljningABB, FG Wilson and Caterpillar IEI, Linköpings Universitet Jakob Rehme Björn Oskarsson building and coordinating the commercial agreement. Logistical activities were coordinated as before in the sales company structure together with order handling etc., keeping the local organisation essential for fulfilment. This also meant that the customer was not treated differently for the provision of goods. Technical coordination and requirements on the product level were qualifiers rather than competitive advantages. The KAM resulted in a close buyer/seller relationship, and high volume transactions. Effects on ABB of the Caterpillar Acquisition In line with the acquisition from Caterpillar the F.G. Wilson organisation became the main production facility outside the US for Caterpillar products as well. The very good contacts that the ABB KAM organisation had established with the F.G. Wilson account was at first thought as a door opener into the rest of the Caterpillar organisation. However, the Caterpillar equipment built in the US and subsequently in Ireland, was based on a different technical solution. This meant that there was little technical advantage in capitalising on the solution constructed for the F.G. Wilson account, since there were no short-­‐term economies of scale for Caterpillar for buying larger volumes. Furthermore, Caterpillar bought their products from a company with a long established US brand name. ABB therefore didn’t put any effort in expanding their sales to Caterpillar. However, they continued selling to F. G. Wilson under a KAM, keeping up the good relation to them. CATERPILLAR OPERATIONS – 1999 – 2013 Caterpillar, headquartered in Peoria, Illinois, have sales and revenues of in the neighbourhood of $40 billion. It is among the world leading manufacturers of construction and mining equipment, diesel and natural gas engines and industrial gas turbines. Caterpillar divides its products, services and technologies into three principal lines of business or segments, namely: machinery, engines and financial products for sale to private and governmental entities. Caterpillar's line of machines range from tracked tractors to hydraulic excavators, backhoe loaders, motor graders, off-­‐highway trucks, wheel loaders, agricultural tractors and locomotives. Caterpillar machinery is used in the construction, road-­‐building, mining, forestry, energy, transportation and material-­‐handling industries. (Caterpillar is the world's largest manufacturer of wheel loaders). A portion of CAT's business is in the manufacturing of diesel and natural gas engines and gas turbines which, in addition to their use in the company's own vehicles, are used as the prime movers in locomotives, semi trucks, marine vessels and ships, as well as providing the power source for peak-­‐load power plants and emergency generators. Caterpillar provides financing and insurance to customers via its worldwide dealer network and generates income through the licensing of the Caterpillar and CAT trademarks and logos. Manufacturing Caterpillar products and components are manufactured in 110 facilities worldwide. 51 plants are located in the United States and 59 overseas plants are located in Australia, Belgium, Brazil, Canada, England, France, Germany, Hungary, India, Indonesia, Italy, Japan, Mexico, the Netherlands, Northern Ireland, the People's Republic of China, Poland, Russia, Singapore, South Africa and Sweden. 7 722A29 Modul: Inköp & FörsäljningABB, FG Wilson and Caterpillar IEI, Linköpings Universitet Jakob Rehme Björn Oskarsson Acquisitions In addition to increasing sales of its core products, much of Caterpillar's growth has been through acquisitions, including FG Wilson in 1999. Since the 1950s Caterpillar has made almost 40 acquisitions all across the world, (US, Europe, South America, India, China etc.), leaving the organisation with an increasingly international business. In recent years the acquisitions have increased. Purchasing Purchasing in Caterpillar has in the past been handled predominantly locally, with local purchasing departments in the different production facilities. (In fact a large number of the companies in the group keep their original brand name, and operate their own sales channel). However, today Caterpillar’s strategy is to centralise the purchasing for suitable components and services. With the extent of acquisitions and the number of production facilities in the Caterpillar organisation, the purchasing strategy becomes a challenge. Finding synergies in the purchasing volumes, while still maintaining strong local links to suppliers, is a matter of great importance for Caterpillar. Caterpillar's global purchasing has a focus on working with global purchasing for leverage, but still trying to maintain local service. The organisation manages the purchase of materials that go into a wide variety of products (more than 300), ranging from construction and mining equipment to diesel and natural gas engines and industrial turbines. Caterpillar works with increasing global sourcing, and they started formal efforts in 2003. In this work they analysed more than 200 suppliers in Latin America, Europe and Asia-­‐Pacific, for their suitability to become global CAT-­‐suppliers. The VP of Purchasing in Caterpillar stated three key aspects in the relationship with Caterpillar suppliers as: 1) Provide strong technical synergy with Caterpillar. 2) A focus on Win/Win opportunities, and 3) Respect for Caterpillar's Business Model of “owning” their customer relationships with the end users. Caterpillar's purchasing from ABB In 2004, ABB had a turnover of circa $20.7 billion and operated in more than 100 countries, employed about 104,000 people worldwide and had five business divisions: Power Products, Power Systems, Automation Products, Robotics and Process Automation. (see Figure 2). 8 722A29 Modul: Inköp & FörsäljningABB, FG Wilson and Caterpillar IEI, Linköpings Universitet Jakob Rehme Björn Oskarsson Figure 2 ABB Organization
Apart from the LV Products (in ABB IPS), there were also other business units, such as ABB Turbochargers (within the Process Automation division), which provided Caterpillar with components. The following product lines were supplied by the ABB organisation to Caterpillar (see Figure 2 for connection between product lines and ABB divisions): 1) Turbochargers; ($40 M) 2) AC Machines -­‐ Alternator/Generators; ($8 M) 3) LV Products -­‐ Breakers, Terminal Blocks, Control Devices (to FG Wilson along with other Caterpillar units) ($8 M) 4) Instrumentation ($6 M) 5) Robotics -­‐ Paint, Powertrain and Welding ($5 M) 1-­‐4 of these were components for Caterpillar products whereas number 5 was for the Caterpillar production, and thus an investment type of products and systems. THE ABB AND CATERPILLAR CASE: PART 2 All in all in 2004, Caterpillar represented over $67 million in revenue for ABB. The bulk of it – over $40 million – came from supplying turbochargers, a crucial component enhancing an engine’s efficiency. Turbochargers were manufactured, designed and engineered by ABB Turbo Systems Ltd in Baden, Switzerland. It was one of the best run and most efficient plants that ABB owned and was the center part of the Turbocharger BU, having another 900 people in sales and service around the globe. Caterpillar was one of Turbo Systems’ top three customers in terms of volume; out of 4,500 turbochargers produced per year, over 30% were sold to Caterpillar generating less than 10% of the BU’s revenue. ABB supplied turbochargers to two of Caterpillar’s plants: Lafayette, Indiana and Kiel, Germany. Lafayette Engine Center (LEC) had been producing high speed engines since 9 722A29 Modul: Inköp & FörsäljningABB, FG Wilson and Caterpillar IEI, Linköpings Universitet Jakob Rehme Björn Oskarsson 1982 and served a wide variety of market segments including marine, mining, petroleum and power generation. The primary difference between Lafayette and Kiel was product size and quantity: Kiel produced very large diesel engines, as big as 12 meters long and 4 meters high, in small numbers. Caterpillar Motoren GmbH & Co. in Kiel was a world leader for four-­‐stroke medium-­‐
speed diesel engines used in ships for main propulsion. Caterpillar had purchased the company in 1997 and worked to integrate its product line with the rest of the organization. In July 2002, Paul Wroblewski joined the team in Kiel as operations manager. In 2004, he became the general manager. He arrived with a solid reputation for establishing profitable operations, which he was well able to demonstrate at Kiel. Early in Paul’s general manager position at Kiel, he asked his management team to identify the problems as they saw them. Very high on the list was ABB Turbo Systems, one of their three turbocharger suppliers. The Caterpillar managers felt that ABB were holding them hostage: They wanted Paul to develop a different source. This feeling was strongly reinforced when someone from ABB visited Paul one day in response to his request for better delivery support. Paul perceived the reply: You do not understand: It is ABB that will tell you when you will get what product, and how much you will have to pay for them. The CAT manager became totally committed to getting rid of ABB as a supplier. In December 2004 ABB’s new group account manager for Caterpillar, was about to meet the CEO of Caterpillar (Jim Owens), together with senior executives from ABB. The meeting progressed with discussions evolving around general business items until the CAT CEO turned to his vice president of global purchasing, (Dan Murphy), and said: Dan is here with us today to give you some feedback on how we feel you are doing with Caterpillar. The VP started off in a friendly manner: Well, I have been talking to some of my people and have a few ideas to pass on to you. And in general, the input that I got back was that technically ABB is a very good company – you have good products, you know them well and that is great! However, the ABB delegation suddenly felt very uncomfortable as the VP continued: ...But customer-­‐wise and management-­‐wise, there is a big disconnect! As a matter of fact, we were kind of wondering, why you are having this meeting with us today. Because we thought ABB was done with us, because we are kind of done with you! This big disconnect resulted in the business between Caterpillar and ABB was on the verge of closure. 10 722A29 Modul: Inköp & FörsäljningABB, FG Wilson and Caterpillar IEI, Linköpings Universitet Jakob Rehme Björn Oskarsson Frågor till case ABB vs Caterpillar Det finns många frågor som man kan ställa sig kopplat till det aktuella caset. Din uppgift är att efter bästa förmåga besvara nedanstående med hjälp av den litteratur du har till förfogande. Självklart får du också utnyttja kunskap du har sedan tidigare kurser, eller som du förvärvat på annat sätt. Vi förväntar oss att du till seminariet är väl inläst på caset och har gått igenom den problemsituation som ABB står inför. 1. Vad är din syn på vad som var anledningen till att ABB vann kunden FG Wilson? 2. Vad anser du var anledningarna till att Caterpillar resonerade som de gjorde? 3. Vad ska ABB göra? 11