Fiat Auto - "The Miracle of Turin"

Fiat Auto ‘The miracle of Turin’ – maximising performance improvement with a revolutionary approach to cost control Shortlisted 2007 | Category: International Executive summary At the start of 2006, PA Consulting Group was requested by Fiat Auto to support an aggressive cost-reduction programme for annual purchasing of more than €1 billion. The programme covered four crucial new vehicle lines. Through the programme, Fiat Auto: • reduced component prices and renegotiated commercial terms • restructured supply chains and gained cost advantages from low-cost countries • analysed technical design and developed improved and innovative product concepts. Harald Wester, Chief Technical Officer, Engineering and Design, Fiat Auto, said: “The joint Fiat-PA team trebled the number of improvement ideas, and introduced a process that implemented them more quickly than before. Innovative new product designs will improve existing and future model development.” The programme has already added over €80 million of savings to the four vehicle lines on a yearly volume, and this is set to increase. “ PA worked with the integrated multi-disciplined Fiat teams to significantly improve our way of working. In particular, the structured dismantling, evaluation and benchmarking of Fiat cars with competitors’ identified major improvement opportunities. It laid the groundwork for a tremendous increase in idea generation, evaluation and implementation – for both current and future models.” Carlo Bassotto Programme Manager, Engineering and Design  | MCA Awards 2007 The joint team facilitated the cultural changes necessary to embed the new practices within Fiat Auto. Because of this, Fiat Auto can apply the same effective methodology to future programmes and other models. PA believes this is one of the biggest and most comprehensive exercises of its kind ever undertaken, with amortisation of project cost in less than four weeks. What PA did that Fiat Auto could not have done without PA’s involvement PA’s modelling expertise, hands-on engineering knowledge, technological edge and familiarity with industry best practice enabled it to transform Fiat Auto’s success. Brief project background Founded in 1899, Fiat Group manufactures and sells products ranging from agricultural construction equipment to Ferraris. In 2005, it had revenues of €46.5 billion and 220,000 employees. Fiat Auto is the largest company in the Turin-based group, comprising the Fiat, Alfa Romeo and Lancia brands, plus light commercial vehicles, which account for over 40% of group revenue. What was the problem/opportunity faced by the client? Fiat Auto and PA both recognised the major challenge lay in fully understanding all the factors underlying component costs. This is complicated by the industry-wide practice of outsourcing systems and components from Tier-1 suppliers. Fiat Auto still purchased many of its components in Italy via existing relationships, with limited ‘global sourcing’. Fiat Auto’s business often represents a large part of suppliers’ turnover, if it drives too hard a bargain it could put them out of business. Negotations therefore need to identify realistic opportunities for reducing costs. MCA Awards 2007 |  Figure 1: Simplified industry jargon Original Equipment manufacturer (OEM) Eg (vehicle manufacturer) Fiat Tier 1 Eg Eg Eg Etc (system supplier) Fuel system Cockpit Engine Tier 2 Eg Eg Eg Etc (component supplier) Instruments Dash moulding Switches Tier 3 Eg Eg (component/materials Etc Plastic material Fascia inserts supplier) Four new vehicles, Fiat Croma, Grande Punto, Consulting activity Alfa Romeo 159 and Ducato were critical to the Approach proposed by consultants future of the company – these were the focus of PA’s approach with Fiat Auto aimed to create a a combined Fiat Auto/PA team. total understanding of the costs (components, supply chain, technical design), develop cost- Fiat Auto objectives saving ideas, capture and implement every idea. In 2005, Fiat Auto’s CEO took personal control of Fiat Auto’s turnaround programme. It focused on Understanding costs of components these four models not only for survival, but also PA’s versatile and unique cost model and intimate as a springboard for future profitability. It aimed to knowledge of automotive manufacturing processes reduce costs by several hundred euros per car, would allow the joint team to determine what any with a total annual cost reduction target of more component ‘should cost’. The team would then than €100 million by end-2007. investigate any disparity between the ‘should-cost’ and quoted price, and have detailed discussions PA objectives with suppliers to agree savings. Fiat Auto asked PA to accelerate this major cost reduction programme and to help it adopt Understanding costs of supply chain a new methodology, initially focused on the four By analysing the supply chain, PA’s modelling tool new models. could help to identify the optimum supply chain and associated costs. For example, relocation of labour-intensive trim/cover production from Italy and Portugal to Eastern Europe saves more than €10 per car.  | MCA Awards 2007 Figure : Example screens of PA’s modelling tool Understanding costs of technical design Fiat Auto and PA recognised that identifying To analyse Fiat Auto’s own vehicle design and ideas for increasing profitability was not enough. parts complexity, competitors’ vehicles were They had to be captured, systematically literally ‘torn down’. This enabled possible tracked and the most viable ones selected cost benefits from technical changes to be and implemented. identified. PA worked closely with Fiat Auto to improve designs and overcome any What actions were taken? ‘not-invented-here’ mentality. The approach integrated and co-located all major functions – engineering, design, Fiat Auto maximised its entire product design purchasing, supplier development – in an capability – creating innovative designs for existing innovative way. Functions that had operated and future model development – by joining forces across many sites now worked in close proximity with PA’s technology experts. All three of the above to enhance understanding and cross-fertilisation activities were independent – if there were no cost of ideas. The joint team worked together reduction opportunities in one area, they might be throughout the process from benefits identification found in another. to savings delivery. MCA Awards 2007 |  “ The impact on Fiat Auto goes well beyond the four new models. Fiat Auto has significantly improved its approach to costing for all its product ranges.” Gianni Coda Senior Vice President, Purchasing, Fiat Group PA aligned its consultants to Fiat Auto component Idea tracking mechanism ‘clusters’, eg one consultant was responsible for PA developed a tool drawing data from Fiat Auto’s interior-related components, another for external own databases to create a tracking system to trim and so on. monitor progress from idea to production line. Understanding costs and maximising This tracking system also forms the basis for an cost-saving ideas unusual shared risk/reward charging structure for A workshop area (nicknamed ‘the Zoo’ as it was the assignment. PA’s fees are partially determined enclosed by a steel mesh cage!) became the focus by the value of ideas reaching implementation of the process.