Unless you work in the construction, automotive or furniture industries, the chances are you won’t have heard of Rehau. As a family-owned manufacturer of plastic products such as window frames, water pipes and car bumpers, it isn’t the kind of firm that excites much interest from the general business press. But as an example of how procurement can extend its role into innovation and drive company competitiveness, it has an interesting story to tell – one that throws up some useful lessons for CPOs and their teams in other sectors.
Founded in 1948 in the German town of Rehau, from which it takes its name, the firm now has operations in over 40 locations around the world, employing almost 15,000 staff and earning annual revenues in excess of €2 billion. Over time, Rehau has moved away from just making plastic products of its own to assembling water, heating and other systems that incorporate parts from various manufacturers. This is vital for the company’s long-term survival, because some of its products, particularly in the construction industry, which accounts for half its total business, have been commoditised as a result of strong competition from China and elsewhere.
As might be expected of a German manufacturer, Rehau’s strategy is not to be the lowest-cost producer, explains Rainer Schulz, the company’s chief operating officer, but to show “innovation, process and service leadership”. That means not only being highly efficient in purchasing, production and logistics terms, he says, but also having “cleverer products than our competitors”.
With around 50 in-house researchers, Rehau is used to inventing what Schulz describes as “new recipes” for polymers such as polyvinyl chloride (PVC), polypropylene and polyethylene – its key raw materials – and then working with chemical companies, big and small, to manufacture them. But to satisfy the needs of its customers today, it must be effective at tapping the innovative ideas of these and other key suppliers and translating them into marketable products, some of which will be developed jointly.
Nowhere is the pressure to innovate stronger than in the automotive industry, from which Rehau derives another 30 per cent of its revenues. As a first-tier supplier to the likes of Daimler, BMW, Volkswagen, Toyota and General Motors, the company not only has to meet stringent cost, quality and delivery targets, but also demonstrate that it is at the forefront of technological change.
However, notes Schulz, in the past the image of Rehau as an innovator was not one that many of its customers recognised. A customer survey four years ago found that “it was not seen as an innovative company, it was seen as a big oil tanker: driven one way and very hard to change”, he says. As a result, Rehau decided to rebrand itself with a new tagline, “unlimited polymer solutions”, and to introduce an internal change programme designed to get employees in its key functions, including procurement, better focused on innovation.
Enter the innovation scout
To aid internal co-ordination and boost interaction with its supply base, in 2004 Rehau introduced a new role in its 140-strong procurement network – that of “innovation scout”. It is one of six core roles in the function (see figure 1), which is organised around the material group (or category) management structure implemented by Schulz three years earlier when he joined the company from BMW Rolls-Royce as head of materials management and logistics. (As COO, Schulz retains overall responsibility for purchasing, as well as operations, research and development, production and quality assurance.)
Rehau currently has 16 innovation scouts, four of them based in its central procurement function in Muri, just outside the Swiss city of Bern, and the rest in its regional offices around the world. Each scout works across one of the three business divisions: construction, automotive and general industry (which includes the furniture and aerospace sectors and accounts for the remaining fifth of Rehau’s sales). It’s not a full-time position, but one that typically accounts for 20-30 per cent of a person’s time over the course of a working year, reckons Marcel Auer, who combines his scouting duties with those of an automotive buyer and material group manager.
The rationale behind this decision was simple, he says. “It’s very important that innovation scouts are also involved in the daily business. They need to have negotiations with their usual suppliers and be involved, from a purchasing point of view, with the rest of the organisation.” Schulz puts it more vividly: “They need to feel the pain of the purchaser.”
In theory, this combination means that the same buyer could be negotiating prices with a supplier one minute and trying to tap them for innovative ideas the next. But in practice, notes Schulz, the two roles require different skills and attract different personalities. “A very good negotiator can be a very bad innovation scout,” he says. It’s more common for the latter to support a colleague who is negotiating the cost and service elements of a contract.
“It’s an advantage that I can say I work with different purchasers, because it allows me to be the innovation man,” explains Auer. “If one of my colleagues is in hard negotiations regarding a particular part, I can come in later and talk about innovation. It’s a different conversation, another face. Because it’s completely separated, it’s not a psychological problem.”
The scout’s job, he says, has two main elements: first, to have a “helicopter view” of the market and look at how good ideas could be applied inside the company; and second, “to be a co-ordinator between the technical people and the purchasing people”, helping to guide innovation projects through to completion.
Attending exhibitions, talking to supplier personnel, reading trade publications and researching on the internet are all ways of scanning the market, and therefore part of the scout’s day-to-day duties. But new product ideas can also come from customers, employees and via dedicated “innovation days”. Rehau classifies these different sources in three ways (see figure 2):
Top down: requirements driven by customers and the marketplace.
Bottom up: ideas contributed by internal staff and/or external suppliers.
Outside in: ideas generated at workshops with one or two suppliers at a time.
To manage all of these different channels effectively, says Auer, an innovation scout needs to be open minded, creative, team orientated and a good networker, have a strong technical background and be able to communicate with everyone from engineers to marketers. So far, Rehau has been able to draw mostly on existing staff to fill these roles rather than recruiting from outside. But he admits that the mix of skills and qualities required means that “innovation scouts are not easy to find”.
“The main challenge, whether you are looking internally or externally, is to find people with the right mindset,” adds Schulz. “What we have learnt is that being open minded has nothing to do with the age of the person. You can have 50-year-olds who are very open to innovation and 25-year-olds who are not.”
Although you can train people to use knowledge management systems, grasp the essentials of business development and communicate better, developing the “right mindset” is a much more difficult proposition. “I don’t think you can train for that,” says Florian Weissgerber, director of strategic planning and controlling, “but you can perhaps identify a hidden talent in a person and wake that up. Success really depends on identifying the right people.”
Indicators of success
Rehau is pleased with the way the innovation scout model is working so far, says Schulz. So much so that it has extended it beyond procurement and into its technical functions. But four years on it is now looking to ramp up the results, setting a target of double the number of innovative ideas and three times more usable solutions over the next three years. “Whenever an innovation scout comes near my office,” he says, “my first question is ‘where are the next innovations coming from?’.”
One of the main successes he and his colleagues are willing to talk about involved the development of a heated bumper for Audi’s Q7 4x4 vehicle – a project masterminded by Auer (see box, Innovation in practice, below). In another case, scouts organised a series of workshops with one of Rehau’s main polymer suppliers at its UK innovation centre in Ross-on-Wye. The discussions centered on production of a new generation of stiff polypropylene pipes that could be buried in the ground using a mechanical process. “It’s now a very important part of our pipe business,” Schultz says.
Only 10 or 12 such workshops are held each year, he adds, because they require significant advance preparation and a lot of follow-up work to ensure that results are delivered. “And they have to be with the right suppliers,” he says.
Of its 1,000 suppliers of direct materials worldwide, Rehau classes about 50 as “know-how” suppliers – its most strategically important partners – and another 200-plus as “development” suppliers. Together, these are regarded as the most likely sources of innovation and collaboration, and hence are the suppliers that Rehau must build the strongest relationships with. (New potential suppliers with innovative ideas, meanwhile, are encouraged to get in touch via a prominent link on the company’s website.)
“If we want our suppliers to give their newest products to us and not to our competition, and to be developing products together, we need a very close relationship with them,” says Schulz.
Fostering the right climate for this starts with the recognition that relationship management is “a two-way street”. Mutual trust is essential, he says, and from the buyer’s perspective that means being very clear about how you will handle innovative ideas proposed by suppliers. A surefire way of killing trust is to run so-called “concept competitions” among a group of suppliers, then give a losing firm’s ideas to the winning bidder – a practice that Schulz says has been used by some automotive companies (he doesn’t name names, but GM is one that has been accused of doing it in the past).
“We will never do that with our suppliers,” he pledges. “If we develop innovation together with a supplier, then we will not work on it with one of its competitors.” Rehau’s approach is to prepare a business model early on that sets out each company’s rights and obligations in the event that the innovation is successful. This includes issues such as ownership of intellectual property, exclusivity and joint marketing.
Another thing Rehau has learnt from its automotive customers, Schulz explains, is that a requirement to innovate must be “forced” on suppliers. Three or four years ago, he says, some of these customers (typically, those with their own procurement-based innovation scouts) began introducing contribution to innovation into their supplier evaluation process. This conveys a clear message to suppliers: if you don’t propose new ideas, you don’t get as good a rating. Rehau, which is sandwiched between the big car makers (its customers) on one side and big chemical companies such as BASF, Bayer and Borealis (its suppliers) on the other, has followed suit. It now combines its commercial evaluation with a technical one, which includes a series of questions about innovation.
Weighting innovation
However, Schulz adds that automotive customers differ in how they weight innovation. Indeed, some that in the past had a reputation for valuing it highly and being open to ideas now put much greater emphasis on cost, and vice-versa (again, he declines to name names). Whatever the reasons for this shift, as a COO who deals with both customers and suppliers, he is in no doubt about the implications.
“If you focus more on the money, you will not get as many ideas. It’s very simple. If you take the last cent of profit away from a supplier, how can they invest in innovation? It’s impossible. Companies that change their behaviour [to focus more on cost] are not thinking they will get less innovation, but they will.”
When Rehau has a new product idea, he says, “we look at which are the key customers we want to start the discussion with and we make a decision. It depends on how open minded they are about innovation, how open minded their technical people are, and how they will honour the innovation.”
Getting different functions working together effectively and overcoming the “not invented here” syndrome are big challenges in most organisations. In Rehau’s case, it has implemented a number of measures designed to forge greater collaboration. First, each of its material groups has both a lead buyer and a lead engineer who must work together to meet the same cost, quality and product innovation targets. For an engineer, says Schulz, “it does not matter if the innovation comes from himself or from a supplier. So it’s in his own interests to take the innovations from the supply base to fulfil his own target.”
Second, the company encourages innovation roundtable meetings that bring together staff from different functions and business divisions to discuss the most promising new ideas and – importantly – to look at whether there is scope to transfer them from one business to another. (Schulz cites the example of a plastic part designed to “bring in more light to the door area” of a car that will also be a special feature of its next furniture product range.) For the innovation scouts, this kind of knowledge sharing is also facilitated through an annual face-to-face meeting and via regular video and teleconferences.
Third, the company has a number of “innovation mentors” – senior managers and executives (including Schulz) who support the scouts’ work, promote their ideas within the organisation and make financial resources available when needed. And fourth, it runs an internal competition to celebrate the most innovative ideas developed, in particular, by cross-functional teams of engineers, purchasers and marketers.
However, he admits that “you can’t change all the people” and that “we have some very good technicians who are not so open to supplier ideas. There is more work to be done.” What matters when it comes to generating new ideas, he says, is to get open-minded people working together with other open-minded people, regardless of which part of the company they come from, and “give them the feeling that they are a special team”.
Creating the right atmosphere
Asked what advice he has for other companies that are either considering an innovation scout model for purchasing or who have recently started down a similar path, Rainer Schulz’s first tip is “don’t go too fast, it’s a change management process”. And it’s one that must be driven from the top down. “If people don’t feel that top management is supporting them, you will never see a change in the company.” Staff need to be very clear what is expected of them, and this must be reflected in their objectives.
The CPO’s role on innovation is to “create an atmosphere where everybody in the company knows that the board is behind this”. The starting point is being able to demonstrate that “procurement is a partner to the other functions, on the same level”, not a second-class citizen. In a similar vein, they must instil a real belief in suppliers as valuable allies and not simply cost levers. And delivering quick benefits to internal customers, to prove that the scouts’ intervention works, is vitally important.
Last, but not least, a CPO must be able to align the targets of their purchasers with the targets of engineers and other key personnel. “If they have contradictory targets,” Schulz cautions, “they will not work together.”
INNOVATION IN PRACTICE:
A heated exchange
Car bumpers used to be utilitarian pieces of moulded black plastic designed to stop minor bumps from damaging the paint and bodywork. Not any more. These days, they are an integral, colour co-ordinated part of a car’s design and often conceal high-tech wizardry such as parking sensors and cameras.
In the case of Audi’s gigantic 4x4 luxury vehicle, the Q7, the front bumper incorporates adaptive cruise control (ACC) – a radar-based system that automatically maintains a safe distance between the driver’s car and the vehicle in front when the latter slows down. Unfortunately, the technology is prone to failing in cold weather when the bumper ices up, so a special heating system is required to keep it functioning properly.
As a first-tier supplier, Rehau’s job is to assemble the chrome, plastic and other parts made by itself and several other firms, paint the bumper and deliver it to Audi’s factory on a just-in-time basis. The fact that there was only one heating solution on the market and it was expensive was not really Rehau’s concern, as Audi’s own buyers had negotiated the price and placed the order.
“In the past we would have just taken it,” says Rainer Schulz, Rehau’s chief operating officer. “But now it went over the desk of the innovation scout who asked whether we could do it in a different and cheaper way.”
Marcel Auer, automotive buyer and scout, worked quickly with his technical colleagues to design an alternative product and find a supplier to manufacture it. A little over a year later, in September 2006, the new system went live on the Q7 and at half the previous e45 price tag.
“Initially our business division didn’t see a reason to spend money on this, it was hard work to convince them,” Schulz admits. But the effort has paid off not only for Audi, but also for Rehau, which has since had other customers and non-customers asking to “talk to us about how we can develop things with suppliers”, he says.
For a company seeking to position itself as an innovator, rather than simply a producer of plastic parts, that’s not a bad place to be.
FACT FILE:
Rehau at a glance
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Founded in 1948 by Helmut Wagner
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Privately owned, family-controlled firm
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Headquartered in Bavaria, Germany
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President of the supervisory board: Jobst Wagner; Chief executive: Wolfgang Faber
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Annual turnover €2 billion+
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15,000 employees (140 in procurement)
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170 locations in 54 countries
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41 production plants on five continents
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Business divisions: construction (50% of sales), automotive (30%), general industry (20%)
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Products include PVC window frames, water pipes, undersoil heating, car bumpers, hydraulic hose systems, roller shutters
Geraint John (geraint.john@cpoagenda.com) is editor-in-chief of CPO Agenda
