In fiscal year 2020, 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 Group strategy TOGETHER 2025+ stands for more speed, focus and stringency, within the Procurement division as well, accelerating change even more. The focus in 2020 was on implementing the concepts developed in the procurement strategy. Procurement’s key performance indicators were defined as part of a combined system of targets for Group Components and Procurement. This system of targets now gives greater weight to sustainability aspects in the supply chain, alongside the targets for material and investment costs and the timely award of contracts.
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 hardware and software that is strategically relevant and/or crucial for ensuring supplies. The Strategic Value Chain Management committee that has been set up takes strategically important “make, buy or partner” decisions on a regular basis.
The growing volume of software and the new partners and suppliers this entails necessitate adjustments to the process chain and Procurement’s award criteria. The Corporate Sourcing Committee Digital Car is in charge of awarding contracts for vehicle and vehicle-related software optimally and on a weekly basis.
Volkswagen FAST – Supplier network as the basis for success
The FAST (Future Automotive Supply Tracks) initiative from Group Procurement is instrumental in advancing the Volkswagen Group and its supply network in terms of partnerships and future viability.
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 established criteria, a comprehensive assessment of the previous year is disclosed to the suppliers so that improvements can be made together. Strategic agreements on globalization and innovation continue to be core issues of this exchange, in addition to existing supply relationships.
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. Where possible, digital communication media were used for the annual meeting in the reporting year due to the spread of the SARS-CoV-2 virus. The program is updated and refined on an ongoing basis in order to take full advantage of the potential from the FAST initiative in the future as well.
A key task for Procurement is to safeguard supplies for the continually growing requirements of the e-mobility offensive over the next five to ten years in a sustainable way, and while optimizing cost structures.
Group Procurement puts a particular focus on high-voltage batteries and e-resources. By means of benchmarking and requirements-based training, we are increasing our purchasing expertise in this context.
When awarding contracts to our electric mobility partners, we have laid down requirements as regards sustainable supplier 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 aim of achieving cost leadership for electric mobility solutions. To this end, we consider diversification in conjunction with dual-supplier strategies as well as localization of the supplier portfolio for all core components of the electric vehicle fleet 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 safeguard 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 in an automated way 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 a global level, with a presence in the key markets around the world. This enables us to procure production materials, investments in property, plant and equipment, and services worldwide at the quality required and on the best possible terms. Networking among 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. In this context, we are also focusing on start-ups and software suppliers. In familiar and established markets, the regional offices support access to the latest technologies and innovations.
Management of purchased parts and suppliers
Today’s supplier portfolio is characterized by global distribution, segmentation and diversification. We address the challenges this presents by supporting and monitoring the industrialization of suppliers with our procurement supplier management. This starts with auditing and assessing suppliers in preparation for the nomination process and continues with monitoring the maturity of the industrialization of purchased parts, to the complete acceptance and confirmation of the required production capacity at the individual supplier locations. The complexity of the components requires regular monitoring of production processes in order to identify any disruptive factors at an early stage and take action to remedy these. Close cooperation with the quality assurance units at the production sites is crucial for a stable supply of purchased parts for our start-up and series production vehicle projects. The global supplier management network worked reliably, particulary in the face of the challenges posed by the Covid-19 pandemic, and supplies to vehicle and component plants were largely safeguarded throughout the reporting year. Bottlenecks and supply disruption occurred globally due to the restrictions on mobility and border closures, resulting from the pandemic.
Sustainability in supplier relationships
Successful relationships with our business partners are based on respecting 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). These signed documents also contain the expectation that any subsuppliers will be subject to the same standards. We review compliance with the requirements, which has been an explicit condition for award of contract since 2019.
In our sustainability rating – introduced in 2019 and expanded in 2020 – we determine suppliers’ sustainability performance by means of self-disclosures and on-site audits. By the end of the reporting year, we had obtained 13,041 ratings for suppliers, covering 76% of the total order volume. Both the validation of the self-assessment questionnaire and the on-site audits are carried out by selected service providers. 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. Despite the adversities caused by the Covid-19 pandemic, we once again stepped up our focus on advanced and continuing training for suppliers; in fiscal year 2020, more than 12 thousand suppliers took advantage of the training programs.
The focus of our activities in 2020 was on decarbonization, respecting human rights and responsible raw material sourcing.
With regard to decarbonization, the Volkswagen Group is striving to continuously reduce greenhouse gas emissions or avoid them altogether over the entire life cycle of a vehicle. The Group’s transformation into a provider of sustainable mobility solutions and in particular the trend towards electric mobility are shifting the action required from the service life of the vehicle to supply chains and the manufacture of vehicles and components. We are aware of our social responsibility and are committed to the 2°C target of the Paris Climate Agreement. We have therefore incorporated the use of renewable energy into the specifications for battery suppliers.
In respecting human rights in our supply chains, we are guided by international agreements and frameworks as required by the UN Guiding Principles on Business and Human Rights and the principles and conventions of the OECD. To comply with these requirements, we launched a human rights due diligence management system in 2020 to make human rights risks in our supply chain transparent and to mitigate these risks. An additional management system has been set up to effectively manage the sometimes extensive risks in the raw material supply chains. This sets out in detail the prioritization and processing of the raw material supply chains that we classify as particularly high risk. Our current focus is on 16 raw materials. The inclusion of additional transparency requirements for our battery suppliers in 2020 represented a milestone for responsible raw material procurement. These requirements include the disclosure of the entire upstream supply chain by our battery suppliers and is effective for new contracts awarded from fiscal year 2020 onwards.