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Schmuckle to suppliers: Don’t feel too secure

"A little insecurity is necessary in business," says Rainer Schmuckle, Mercedes-Benz chief operating officer.
Mercedes-Benz Carsí ambitious CORE (Costs Down, Revenue Up, Execution) program ended three months early last September. The program met or exceeded all targets for cutting costs, improving quality and boosting profit margins.

Among COREís achievements: Return on sales rose to the targeted 7 percent; material costs were cut by Ä1.5 billion a year and headcount was reduced by 9,700.

Mercedes Chief Operating Officer Rainer Schmuckle says cost reduction is now a permanent process at the automaker.

Schmuckle spoke with Automotive News Europe Staff Reporter Bettina Mayer earlier this month about Mercedesí future cost-cutting plans.

Will there be another CORE program?

No, but we have established savings targets for specific departments to meet in the next few years. Working to reduce costs remains a high priority at Mercedes. For example, our focus on productivity will be continued for another two years.

Do you have a new target for purchasing savings?

With CORE, we reduced material costs by Ä1.5 billion in 2006 and 2007. Iím confident that weíll have further savings in 2008 and 2009 even though most raw material prices are rising. I expect to retain the Ä1.5 billion reduction and increase it this year by a few hundred million euros. CORE was the starting point for a new module strategy that will start generating significant savings from 2009 on because it allows us to use a wider range of common components and technologies between models.

Where will most savings come from?

Global sourcing is one piece of the cake, but not the biggest or most important. The ability to offer our suppliers simplified and standardized technical requirements, as well as economies of scale, is more important because it helps them reduce their costs.

What is the effect of continuing price cuts on your suppliers?

CORE did not just focus on prices, it also emphasized quality. We evaluate suppliers by four factors: cost, quality, innovation and logistics. Are the suppliers in the same markets we are working in, or will they follow us? How good and how safe is the supply chain? Can they adapt to short-term changes in the product mix?

What have you learned as a manager from CORE?

I try to make my employees understand that they should not feel too safe. A little insecurity is necessary in business. Too much security leads to arrogance, and arrogance leads to bad performance. Maintaining that sense of uneasiness is important.

Does that apply to suppliers too?

It applies to everybody.

Do you have premium suppliers?

Yes, we do. We also have supplier awards. They are chosen through those four characteristics. We are inflexible on this point: If a supplier fails one of those four points, it wonít get a new contract. But I think there is no conflict between cost and quality. We have fixed milestones in the purchasing process. They are part of the quality-gate plan and suppliers get detailed quality targets that say what they have to do at which level of development. Having a clearly defined process helps both costs and quality.

How many suppliers did you lose because of price cutting under CORE?

None. I donít have a target for cutting the number of suppliers and it is not my goal to weaken suppliers by unrealistic price demands. Itís not effective to lose a supplier; you can lose accumulated cost and quality benefits in one stroke by the loss of a supplier. Thatís why we offer suppliers access to long-term partnerships. To me, European suppliers and OEMs should recognize their common destiny. I think we should concentrate on this more than in the past. That means we should work more closely together in protecting our innovations for a longer time and in sharing the common wealth. I think we open a new chapter of the book.

How are you dealing with rising costs?

We have signed some long-term contracts for materials and we are trying to offset the pressure on prices through better manufacturing efficiencies. But itís clear that we face serious inflationary pressures, primarily because of rising raw materials prices. Itís not just metals, itís anything derived from oil, like plastic. Thereís also been upward pressure on wages that we have to absorb.

How far ahead do you set your targets?

I prefer to have every sector -- for example, a materials group like steel -- on two- or three-year programs. Itís always best to have mid-term targets. For continuity, there also should be two or three one-year targets every year. In that way, workers and management donít have to discuss strategy all the time. The goals are set. Every one of our plants has some one-year targets to achieve.

How are things going now that CORE is finished?

The mission was fulfilled. We worked two years on the program and it yielded excellent results. But we have to continue working to bring costs down because the European auto industry will have to deal with pressure from the coming CO2 legislation. It will have a lasting commercial effect on the industry because we donít believe that all the cost can be passed on to the customer.

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