Value Creation through Operations Excellence

Fredrick Spalcke, Philips, Executive Vice President & Chief Procurement Officer
Dr. Karel Eloot, McKinsey & Company Shanghai, Senior Partner
Tsinghua Leadership Course Operations Module
Beijing, November, 2015

No part of this material may be circulated, quoted, or reproduced for distribution without prior
written approval from McKinsey & Company, Inc. and Shanghai Philips. This material was used
during an oral presentation; it is not a complete record of the discussion.

Contents

Perspective on Operations in China

Operations excellence impact on corporate
market value

Philips excellence in procurement and

supply chain

Excellence in other operations areas

Operations transformation enablers:

organization and capability

Key takeaways

Manufacturing1 is today a pivotal part of Chinas economy

2014 China GDP contribution
by sector
Construction
11

2014 China employment distribution

by sector

Agriculture

Construction

10
12

Agriculture

30

36
43
41
Service

Manufacturing1

Service

23 trillion RMB

17
Manufacturing
130 million people

1 Use industry GDP to represent manufacturing GDP, including traditional manufacturing and mining
2 Use 2008 employment portion to extrapolate the manufacturing employment in 2014
SOURCE: National Bureau of Statistics

The strong growth of manufacturing in China has been driven by a unique

combination of factors
Low labor cost

2014
Labor salary
$/hr

Robust supply
base

Number of
electronic
component
manufacturers

3,500

Advanced
infrastructure

Capex/GDP
index of ports
%

100

Manufacturing
& engineering
capacity

High school and

above educated
Million

282

Huge domestic
market

Passenger car
sales in 2014
Million units

18

SOURCE: EIU world data; World DataBank; WIS; China Auto Industry Association

3.3

1.7

38.0

700

56

145

91

14

Industries in China are facing challenges in different dimensions

Rising costs

More complicated
value chain

Labor cost comparison among LCC (%)

100
52
20

No. of countries a leading Chinese Telecom OEM sells to

140
70
15
1
1995

More sophisticated
customers
requirement

2000

2005

Now

The quality of our panel is lower than Korean competitors and we can not meet high-end customers
requirement
Local panel OEM manager
Steel demand vs. supply growth rate in China

More volatile
demand

SOURCE: McKinsey

Demand
Capacity

Given particular sensitivity to challenges in China, industries need

to focus on the top ones of their archetype
Pain points
Sophisticated requirement
Automotive

High tech

No. of researchers and technicians per million people

852

Complicated supply chain

Sophisticated requirement

4,584

% of products produced in China

59

50

70

White goods TV
Textiles

SOURCE: McKinsey

68

Mobile Computer

Rising costs
Complicated supply chain

Annual labor salary increase rate, 2010-2015 CARG %

3
-2
13

Complicated supply chain

China FMCG market breakdown

Regional
processing

Metals

3,302

200 253
2010

Rising costs
Volatile demand

552

318
2015F

T1/T2, 80 cities
T3/T4 ~840 cities

% of global capacity in China

45
Steel

70
44
23
Cement Alumina Copper
5

Contents

Perspective on Operations in China

Operations excellence impact on
corporate market value

Philips excellence in procurement and supply

chain

Excellence in other operations areas

Operations transformation enablers:

organization and capability

Key takeaways

6
8

Operational levers are key drivers of company value

Operational levers

Income

Revenue

Operations
excellence
Product cost &
Expenses
Cost and
expense
Net working capital

Fixed assets

SOURCE: McKinsey

Quality
Delivery reliability
Lead time
Flexibility
Product portfolio
Effective sourcing
Design-to-cost
Labor productivity
Labor cost
Capital productivity
Effective use of IT
Process stability
Lead times
Sourcing contracts
Space utilization
Capital productivity

Significant impact potential from operations

improvement initiatives
Improvement levers

Total consolidated
potential of 15 - 30%
before adjustments for
Price-cost squeeze
Tax effects

Purchasing and supply

management
Supply chain management
Manufacturing

Profit
Product development
Service operations
Sales force effectiveness

MCKINSEY EXPERIENCE

Example pre-tax ROIC1

improvement, Percent
7 - 11 Actual
distribution
2-3
of levers
depending
5-7
on actual
performance
5 - 10 levels,
industry, and
company
2-3
structure
5 - 14

EVA
Purchasing-capital expenditure
items

Invested
capital

Supply chain management/network

configuration

2-7
2-5

Manufacturing inventory
Manufacturing investment/
depreciation reductions

2-3

1 Partly overlapping potential

SOURCE: McKinsey

10
8

The key to success in the new environment is becoming efficiency-driven,

instead of remaining growth-driven
DtC, DtV, DfX
Modular strategy
Engineering driven

Labor productivity and

Product
development

product ideas
R&D excellence

Advanced
Manufacturing

Ops
Procure- Excellence Capital
producment
tivity

"Make or buy
Supply and contracting

Supply
chain

strategies
Supplier selection
and development

Demand sensing and shaping

Inventory strategies
End-to-end planning, forecasting
Logistics optimization
Supply chain 4.0

flexibility
Ramp up/down capacities
Process design flexibility
Resource productivity
Innovations / Industry 4.0

Lean capex
Lean construction
Asset footprint
Asset flexibility

Operations
transformation and
capability building

9
7

Contents

Perspective on Operations in China

Operations excellence impact on corporate
market value

Philips excellence in procurement and

supply chain
Philips at a glance- Context

Connecting Procurement through processes

Connecting Procurement to Development
and Supply Chain

Excellence in other operations areas

Operations transformation enablers:
organization and capability

Key takeaways

10
14

Philips is well positioned for the future

Growing demand for integral

value-based healthcare
solutions

Growth geographies
with growing middle class
Rising health & well-being
consciousness

The world needs more light

and energy efficient lighting
Digitalization driving
demand
for integrated lighting
solutions

SOURCE: Philips

Healthcare

with more chronic diseases

Consumer
Lifestyle

Growing and aging population

Our Business Domains

Lighting

Mega Trends

Imaging systems
for diagnostics and therapy
Patient care for hospital
and home
Clinical Informatics
& consulting services
Personal health & well-being
appliances and services

Light sources
Lighting applications,
systems and services

11

Path to value capture

Categories

Measures

Overhead cost reduction program increased from EUR 1.1

Margin Impact
20161
>100 bps

billion to EUR 1.5 billion by 2015

Productivity

EUR 1 billion through Design for Excellence (DfX) between

100-200 bps

2014-2016 contributing to gross margin expansion

End2End productivity gains to be achieved by 2016

Additional Productivity Improvements
Investments
in
productivity
Investments
in growth
Contingency

Incremental one-time restructuring costs, investments to

>100 bps
300-400 bps

- 50 bps

upgrade IT systems, and re-engineer end to end processes

between 2014-2016

Incremental investments in new (organic) growth in

- 100 bps

adjacencies with returns after 2016

Contingencies to cater for moderate fluctuations in market

- 50 bps

growth and price erosion compared to our assumptions

Net Improvement in 2016 Reported EBITA

100-200 bps

1 Approximate margin impact in 2016 compared to 2013 baseline

SOURCE: Philips

12

Philips is also focusing on operational excellence

Accelerate!

Customer centricity Resource to win End2End Culture Operating model

SOURCE: Philips

13

Philips Accelerate overview

Backbone Architecture

Customer
focused

People,
Assets,
and
Positions

Strategy,
planning and
performance
management

Processes

Leveraging
Industry
benchmarks
unless it truly
adds value

IT
Systems

Simple IT platforms
enabling process
capabilities across
business models

Information and
(master)
data

SOURCE: Philips

End2End value
proposition

Markets

End2End process capabilities

End2End customer
value chain

IT landscape

PLM

CRM

ERP

Master data domains

Simplified and
underpinning all
IT platforms

14

Philips process framework

SOURCE: Philips

15

Connecting procurement through processes

Product
development

Procurement

Advanced
Manufacturing

Ops
Excellence

Capital
productivity

Supply
chain

16
21

Philips Procurements Process House video

SOURCE: Philips

17

Philips Procurements Process House video

SOURCE: Philips

18

Most Procurement levers have been identified and promoted

for a very long time

Organizational Positioning
Global Commodity Management / Global Sourcing
Early Involvement and Early Supplier Involvement (ESI)

90s

E-everything
Total Cost of Ownership
Supplier Quality Management and Development (i.e. Lean)
Make vs. Buy (e2e Value Chain design)
Risk mitigated Value Chains
Corporate Social Responsibility
Circular Economies

SOURCE: Philips

90s / 00s

19

Procurement orchestration of the E2E value chain through external

& internal suppliers

R&D Technical
Partners

Feature
Trade-offs

ODMs &
OEMs

Channel
Partners

Competitive
Value Proposition

Hard & Software

Customer
R&D Platforms
Insight
Strategies

Global 3rd Party

Manufacturing

Suppliers

Procurement

Philips
Value Chain1

Make vs. Buy

Manufacturing
& Testing

3PL &
3PSCM

Service
Alliances

Virtual Vertical
Value Chains

Service
Distribution
& Warehousing & Returns

Customer

Note: A Philips best of best strategy is good for the customers and a great opportunity for suppliers
1 Example
SOURCE: Philips

20

Philips Procurement performance expectation communicated

to the shareholders

EUR 1 billion through Design for

Excellence (DfX) between 2014-2016
contributing to gross margin expansion
(CEO)

There are many advanced ways

for a Procurement function to drive value
to the bottom line, but at the end all these
activities must lead to tangible cost
reductions and revenue increases through
supplier innovation

SOURCE: Philips

21

Connecting Procurement to Marketing, Product development and

Supply chain

Marketing
Customer
insights
Product
strategy
Product
positioning
Customer
value

Product
development

Procurement

Advanced
Manufacturing

Ops
Excellence

Capital
productivity

Supply
chain

22
25

The Philips DfX process: the tools we use

SOURCE: Philips

23

The Philips DfX process: focus on early savings hypotheses

A Set up project
B Clarify scope
C Formulate early savings hypotheses
D Generate savings ideas

E Prioritize, select and allocate resources to ideas

F Report and track savings
G Train/Capability building

SOURCE: Philips

24

C1 Should cost analysis

Input for analysis

Philips

Shop floor
observations
Machine rates
Depreciation
Wages
Market overview
Commodity prices
(e.g., raw
materials, utilities)
Industry standards
(e.g., overheads,
productivity)
Taxes and tariffs

Clean
sheet
cost
breakdown
Ex-works Supply
material chain
cost cost

Application

Material

Landed Labor
material cost
cost
Labor

Depreciation

Other

Manu- Profit
facturing
cost

Exworks
product
price

Plant
overhead

Manufacturing

What should be the cost of products manufactured/assembled in that plant?

What would be the cost if outsourced?

SOURCE: Philips

25

C1 Clean sheet

Material

Detailed levers
Spend1 ($,M)
1a Negotiate payment terms and conditions
1b Make or buy
1c Consolidate spend
1d Negotiate price/introduce competition
1e Localized vs. Global

Labor

2a
2b
2c
3a
3b

Cost buckets

Levers

Total
landed
cost

Price

Volume

Efficiency (OLE)

Rate

4a Labor rate - regular

4b Labor rate- overheads (overtime, benefits)

OEE

5a Improve throughput

Plant/facility
burden

6a Optimize plant layout

6b Improve energy consumption

Inventory
carrying-cost
SG&A2

7a
7b

Transportation

8a
8b

Tax/duties

9a

Plant overheads

Landed cost
Corp. allocation
SOURCE: Philips

Standardize SKUs/Substitute, materials

Reduce excess material
Reduce specification
Optimize over time
Reduce idle time

Improve demand planning2

Reduce lead time
Improve obsolescence
Optimize transportation rates/unit2
Optimize packaging
Optimize foot print
Optimize foot print
26

C2 Cost assumptions

Levers

Observations

1a

Negotiate payment terms and conditions

with suppliers

Payment terms matches industry best

1b

Optimize the make vs buy split for key

components e.g., XX

Internal XXX costs not tracking with the

Reduce no. of suppliers in categories

like metal parts, XXX by moving to
strategic suppliers

70% of spend is consolidated in 14

Renegotiate rates with key suppliers

using the should-cost clean sheet model
on high spend components

Average/median prices have decreased

Reduce the number of SKUs on

components such as frames, XXX by
standardization

Frames and packages are not

2a

Identify cheaper substitutes for high

volume raw materials e.g., Aluminum

Circular pre-cut Al sheets for XXXXX

2b

Eliminate excess material from products

and packaging

Thicker XXXX, packaging and driver

2c

Introduce good enough design and

minimize over specification

XXX are XXXX rather than painted

1c

1d

2013 Savings
$, M

Annualized
$, M

First
impact

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

XX

practice of XX days

market cost roadmap

suppliers and other 30% is distributed

over ~ 300 suppliers

by <2% from 2011 to 2012 for top

external suppliers

Materials
2a

SOURCE: Philips

standardized; over 2000 SKUs

instead of rolled stock

housing; Lengthier cables; XXXXpacks

within boxes

27

C2 Cost assumptions

Levers

Labor

Plant OH

Landed
cost

Observations

3a

Optimize overtime in specific cells by

cross-training and load balancing

High degree of throughput variabil-ity

3b

Reduce idle time in facility by optimizing

no. of shifts, duration of shift

4a

2013 Savings
$, M

Annualized
$, M

First
impact

XX

XX

XX

Shift is not fully utilized

XX

XX

XX

Review labor rates in comparison with

regional market rates

Labor rates are in-line with statistics

XX

XX

XX

4b

Review labor OH rates and compare with

industry benchmarks

Labor OH is XX% of overall labor rate

XX

XX

XX

5a

Improve throughput by setting an optimal

routing plan

Routing plans not in line with similar

XX

XX

XX

6a

Optimize plant layout to reduce cell-tocell movement of material

Sub-optimal cell-to-cell transfer

XX

XX

XX

6b

Reduce energy consumption by

minimizing energy waste

Underutilized parts of the facility e.g.,

XX

XX

XX

7a

Reduce inventory lead time

Inventory days up from 20 to 50 days in

XX

XX

XX

7b

Improve time to obseletion by assessing

write-offs

Significant amount of old XX boards still

XX

XX

XX

8a

Optimize packaging to reduce shipping

costs

XX packaging has more inserts than

XX

XX

XX

8b

Optimize supplier locations

for transportation cost

Die casting produced in Taiwan,

XX

XX

XX

9a

Optimize supplier locations for duties

Die casting produced in Taiwan,

XX

XX

XX

SOURCE: Philips

on certain cells e.g., painting

from the Bureau of Labor

which is in-line with industry
benchmarks
industry benchmarks

Inventory room/tooling shack heated

the past year
maintained in inventory
competitors; Competitor had lesser
packing material
explore Mexico option
explore Mexico option
28

C2 Cost assumptions summary

Cost buckets
Material for manuf.

(Percent)

Supplier base can be

XX
3

Freight

significant portion
of total cost (29%) due
to intensive use of man
power

XX
14

Overhead
Utilities

Supplies & other Opex

10

Depreciation
Total

41

Machines are largely

XX

5
41

further consolidated
Low cost countries
represent significant
portion

Labor represents a

26

Wages & salaries

Plant
overhead
(18%)

Observations

38

Materials
(41%)

Labor
(41%)

($M)

18 100%

depreciated

Total cost XXX($XXM)

Minus XXX ($XXM)
39%

XXX should be removed from TCO analysis and addressed in procurement levers
SOURCE: Philips

29

C3 Competitive teardown localization

Pure local supplier
Degree of
localization
(supply base)

Covered by DfX Clean Sheet

MNC supplier in China

Covered by DfX localization

Local supplier + MNC in China

Potential opportunity
through localization

MNC in China + Imported

Purely imported
Module XYZ
Slide

PCBA

Supplier Supplier

Casting

Cover

Rotor

Sheet
metal

Cable

Power
supply

TBD

Supplier

TBD
Supplier

Rack

TBD

Supplier

Competitor

SOURCE: Philips

Motor

Supplier

TBD

Supplier Supplier

Holding

Supplier

Competitor

Supplier Supplier

Drives

TBD

TBD

TBD
Supplier

30

C3 Competitive teardown example

SOURCE: Philips

31

C3 Competitive teardown example

SOURCE: Philips

32

C4 Value engineering example

Consumer Luminaire Disney Example

A Redesigned user interaction

B Reduced redundancy
XX% less material usage
XX% part count
reduction
XX packaging
cost savings

Small, hidden

Larger

Red parts
omitted in
new design

display
display
Complex 4-button Button-only
and knob UI
interface
Access hampered Unencumber
by adapter cable
ed access

SOURCE: Philips

33

Supply Chain
4.0
redesigning the
supply chain in
the digital age
SOURCE: McKinsey

34

SC4.0 example physical flow: Shopping cart and drones can be used to
improve shelf availability and improve efficiency in cycle counting
Camera at shopping
cart scans shelves on
customers tour

A camera mounted on
a drone is scanning
the products / pallets

Video streaming the

bar codes on the
stored goods
directly to
central
analysis and
calculation,
giving

Branch manager
receives
information about
out of shelf and
visited aisles

an instant basis
for decisions!

Improvements

Shelf availability increases

Wrong placed products/broken package can be detected immediately
Information on which aisles are visited leveraged to improve planogram
SOURCE: McKinsey, Yinzcam

35

Companies have an opportunity to change the way they do purchasing

and supplier mgt. by digitizing the end-to-end BUYER process
E2E eBUYER PROCESS

Build

Setup for
crossfunctional
impact

Understand

Yield

Analyze
demand and
supply market
dynamics

Develop and
align on
category/
sourcing
strategy

Execute

Implement
strategy
internally and
externally

Review

Manage
category and
supplier
performance

36

Message or topic title

eBUYER

SOURCE: Source

37

Contents

Perspective on Operations in China

Operations excellence impact on
corporate market value

Philips excellence in procurement and

supply chain

Excellence in other operations areas

Advanced manufacturing

Capital productivity

Operations transformation enablers:

organization and capability

Key takeaways

39
40

Advanced manufacturing: the answer for our volatile world

1 Advanced lean

implementation

2 Resource

Productivity

Product
development

Procurement

Advanced
Manufacturing

Ops
Excellence

3 Industry 4.0

Capital
productivity

Supply
chain

40
41

ADVANCED LEAN IMPLEMENTATION

1 Advanced lean implementation: in our volatile world, advanced lean

focuses even more strongly on inflexibility and variability reduction
Basic lean implementation

Advanced lean implementation

Waste

Inflexibility

Variability

Traditional demand forecasts

Scenario demand forecasts

Demand

Variability

Demand

Inflexibility

Waste

Time
SOURCE: McKinsey Agile Manufacturing

Balance
tradeoffs
rather than
just focus on
visible waste

Use more
sophisticated
tools (e.g.,
scenariobased
forecasting)
Time
41

ADVANCED LEAN IMPLEMENTATION

1 The need to increase flexibility in operations in light of possible

slow down are top COO and CXO concerns
What are the top uncertainties your company is concerned about?
Percent of respondents who selected uncertainty in top 3
Broader economic slowdown

63

Commodity price volatility

37

Demand shift creating volume drops

33

Economic turmoil in specific regions

33

Demand shift creating volume spikes

30

New competitor/competition

22

Supplier breakdown or quality issue

19

Supplier insolvency

15

Exchange rate risk

15

Natural disaster

11

Labor strike
Plant equipment breakdown

SOURCE: McKinsey flexible Operations Executive Survey, July 19th 2012

7
4

Most are
concerned about a
broader economic
slowdown
Other
uncertainties are
more industry and
company specific
Carlos Ghosn
"leaders need to
be ready to cope
with far more
externallyimposed crises "
42

ADVANCED LEAN IMPLEMENTATION

1 Flexibility and ability to act through cycles

Preempt
How can labor
cost be made
more flexible?
How manage
WIP to optimize
capital?

Detect
What leading indicators
should be followed?
What systems and
processes needed o
generate real-time
visibility?

Improve productivity
and cost structure
Application of lean
principles, reduction of
waste

SOURCE: McKinsey

Respond
What skills do
managers/employees
need to rapidly ramp
up?

Improve cost flexibility

Scale fixed and variable
cost base with demand
Improve ability to weather

Demand

Organizational capability

Capacity

P&L impact

Capture advantage
from quick recovery
What degree of
flexibility / excess
capacity required
in plants?

Increase volume flexiblity

Technical/organizational
ability of an operating
system to meet demand
swings

43

ADVANCED LEAN IMPLEMENTATION

1 For manufacturing companies we typically estimate the maximum

flexibility from five high-level categories
Lever description

Fixed and variable cost reduction (>30%)

Cost reduction

Fixed cost to
variable
Flexibility of
variable cost

Production
setup flexibility

Personnel and contractors

Indirect purchasing
Energy (efficiency), yield

~15-30

Outsourcing with flexible contracts

~15-20

Commercial contract restructuring (raw

~5-201

Flexibility in operating model (modularity,

~5-10

(production functions, production functions)

Work force flexibilization
materials, end customer pricing)
Labor contracts flexibility

ramp-up/ramp-down capability, foot-print

optimization)
Capital optimization and location of inventory

Capability building on scenarios and

Organization
responsiveness

Max impact at low utilization

Savings; Percent

responses, statistical demand forecasting

Scenario planning, trigger points and
actions/measures

N/A

1 Likely negative impact in maximum utilization scenario

SOURCE: McKinsey

44

RESOURCE PRODUCTIVITY

2 Resource Productive Operations: Energy efficiency requires focus

on the technical system, management infrastructure and mindsets
Best practices for energy
efficiency
Technical limit and
standardization
approaches

Energy KPIs on
leaderships agenda
and cross-functional
energy efficiency work

Typical pitfalls in China

Typical opportunities
Energy efficiency example

Rely on technical
investment

Lack of measurement
of energy consumption

Energy consumption
savings can reduce hot
strip mill energy cost by
15~20%

Main levers
Technical limit analysis
Energy bridge

Cost curve
Understand and focus
on energy cost

SOURCE: McKinsey

No risk mindset

Parameter control

drives reluctance to
improve

45

RESOURCE PRODUCTIVITY

2 Benchmark with nature, not just competitors: Theoretical Limit to

understand how far can I go? and accelerate improvement
Theoretical
limit

Performance
level

Target state
within 24 months
and payback < 2
years
State after bottomup design future
state (incremental
approach)

Current
state
Time

SOURCE: McKinsey

46
47

RESOURCE PRODUCTIVITY

2 Theoretical limit is the minimum amount of energy required

theoretically for a system to function
Energy consumption per year
Can be overcome by changes in
operations as they usually come from
operating at out-of-spec conditions

50%

Can be partly overcome by

capital expenditure but is subject
to diminishing returns

Actual
Operational Design limit
consumption losses

SOURCE: McKinsey

Design
losses

50%

Theoretical
limit

47
48

INNOVATION/INDUSTRY 4.0

3 Industry 4.0 disrupts the industrial value chain and requires companies
to rethink their way of doing business
Eliminating inefficiencies across the digital
thread (i.e., better use of information not
captured/made available/used today)
Achieving an end-to-end digital integration of
operations (e.g. raw material to consumer)

Data, computational
power, and
connectivity e.g.,
LPWA1 networks
Analytics and
intelligence e.g., big
data
Human machine
inter-action e.g.,
augmented reality
Digital-to-physical
conversion e.g.,
3-D printing

Build digital

Disruptive
technologies

Reach next
level of
operational
effectiveness

Adapt
business
models

Transform
into a
digital
company

1 Low-power, wide-area
SOURCE: McKinsey

capabilities
Enable collaboration in
the ecosystem e.g.,
definition of standards,
building strategic
partnership
Manage data as a
valuable asset
Implement 2-speed
systems/data
architecture
Manage cyber security

Four new trends: As-a-service business

models, platforms, intellectual-propertyrights-based models, and data-driven
business models.

48

Text

49

INNOVATION/INDUSTRY 4.0

3 Industry 4.0 disruptive technologies that will change the

manufacturing sector from today until 2025
Data, computational power &
connectivity
Big data/open data
Significantly reduced
costs of computation,
storage,
and sensors
Internet of things/M2M
Reduced cost of smallscale hardware and
connectivity
(e.g., through LPWA
networks)

Cloud technology
Centralization of data
and virtualization of
storage

SOURCE: McKinsey Industry 4.0 KIP

Analytics and
intelligence
Digitization and
automation
of knowledge work
Breakthrough advances
in artificial intelligence
and
machine learning
Advanced analytics
Improved algorithms
and largely improved
availability of data

Human
machine
interaction
Touch interfaces and
next-level GUIs
Quick proliferation via
consumer devices
Virtual and augmented
reality
Breakthrough of optical
head-mounted displays
(e.g., Google Glass)

Conversion to
physical world
Additive manufacturing
(i.e., 3D Printing)
Expanding range of
materials, declining
prices, increased quality
Advanced robotics (e.g.,
human-robot
collaboration)
Advances in AI, machine
vision, M2M
communication as well as
cheaper actuators
Energy storage and
harvesting
Increasingly cost effective
options for storing energy
and harvesting energy
50

INNOVATION/INDUSTRY 4.0

3 New forms of human machine interaction can further

optimize production processes
Augmented reality

Exoskeletons

Gesture recognition

Ubimax apps on Google

Glass

Festo ExoHand

Microsoft Kinect

Exoskeleton emulating

Input device for Windows

Description Applications on Google

Glass showing locationbased instructions to
workers (e.g., directions
where to go, how to
complete a task)

physiology of human hand

Can support straining
manual movements (worn
as glove) and transmit
human hand movements to
robot hand

PCs enabling gesture, facial,

and voice recognition

More efficient warehouse/

Acceleration of processes
Documentation of
Possible
assembly/service processes
that require straining manual
component quality flaws
Industry 4.0
work by enabling workers to
through pointing at an onapplication Virtual training of workers
Remote assistance with
do them faster and more
screen 3D representation
plant maintenance
often
Enabling of remote handling
of dangerous goods
SOURCE: Ubimax, Festo, Microsoft

51

INNOVATION/INDUSTRY 4.0

3 Based on advances in technology, robots are gaining

performance while getting cheaper
Robots are gaining performance while
getting cheaper
Index of average industrial robot price relative
to labor compensation, Percent

which is driven by significant advancement

in technologies
3D camera
technology

Advancement in 3D vision systems

Processing
& computing
technologies

Progress on programming

Advancement
in actuators

Piezoelectric actuator can be used

105
100
95
90
85
80
75
70
65
60

-5% p.a.

55
50
0
2000

2002

2004

2006

SOURCE: McKinsey Industry 4.0 KIP

2008

2010

2012

enable better object detection

Low-cost consumer-grade 3D
imaging systems enable relatively
inexpensive robots
Self-localization enables that robots
move autonomously on shop floor

methods for industrial robots,

e.g., using augmented reality
Enables e.g. real-time selflocalization on shop floor

for handling and grasping of

miniature parts
Series elastic actuators can help
robots detect and control the force
of its movements, and avoid any
accident with human co-workers 52

INNOVATION/INDUSTRY 4.0

3 Eliminating digital inefficiencies along digital thread could unlock

potential along 8 different value drivers

Product finally has more features than

the customer is willing to pay for

Supply/demand match

1st prototype showed serious

flaws in test, team is waiting
for next one, is too slow

Worker spends time documenting process

Labor effectiveness
Machine is down due to incident - Information was
not captured/used to predict maintenance need

Time to market

Asset utilization
Machine is serviced although
condition was still perfect

8
4

Service/aftersales

Unclear inventory level led to

an increased safety stock

Inventories
Scrap produced due to
wrong specifications of
machine

Quality

Piece is waiting to pass through process

station although it doesn't require processing at this station

2
SOURCE: McKinsey

Resource/process
effectiveness
53
56

INNOVATION/INDUSTRY 4.0

3 We have identified a number of use cases that illustrate how impact

can be created in 8 value drivers

remote
8 Secomeas
access technology

Knapp uses
augmented reality
glasses to increase
warehouse worker
effectiveness

facilitates service and

predictive maintenance

Motors
7 Local
leverages 3D

Service/
after-sales

printing,
crowdsourcing, and
micro-factories

Automotive player
uses Big Data
analytics to adapt
offerings to
customer needs
Toyota uses
Advanced Analytics
to decrease quality
issues in production

SOURCE: McKinsey Industry 4.0 KIP

Labor
effectiveness

Resource
/process
effectiveness

Time to
market

Automotive
player

Supply/
demand
match

Bosch uses RFID

technology to
establish autonomous transport
systems

Asset
utilization

Quality

Inventories

Condition-based
maintenance at
BMW and GE
leads to fewer
breakdowns

Wrth developed
"intelligent" storage
boxes to improve
inventory
management

54

Contents

Perspective on Operations in China

Operations excellence impact on
corporate market value

Philips excellence in procurement and

supply chain

Excellence in other operations areas

Advanced manufacturing

Capital productivity

Operations transformation enablers:

organization and capability

Key takeaways

55
59

Capital productivity

Product
development

Procurement

Advanced
Manufacturing

Ops
Excellence

Capital
productivity

Supply
chain

56
60

CAPITAL PRODUCTIVITY

Capital Productivity: Improving capex efficiency requires strict execution

across the entire capex value chain
Best practices for
capex efficiency

Typical pitfalls in China

Allocation of capital based on

Portfolio
optimization

limited experience

Lack of scientific risk evaluation

Focus on key process design,
ignoring supporting system

Not considering improvement

Lean design

opportunities on specs

Performance management of
contractors too lax
Procurement and
contracting

Lack of understanding of
suppliers cost base

Lack of transparency
and cross-functional project
management

Project
management

SOURCE: McKinsey

Construction and ramp-up not

closely integrated

Typical improvement
opportunities

Typical opportunities
Lean design example

-15% capex reduction while

maintaining same level of
capacity and quality

Main levers
Search for each component of
the project for the lowest cost
solution that just solves the
business problem: Minimum
Technical Solution
Fully leverage China
supplier chain
Optimize space requirements
Avoid overcapacity
Reduce initial spare parts
needs
Set high utilization targets

57

CAPITAL PRODUCTIVITY

Icon provides a solution for performance management in construction,

filling gap in current IT solutions landscape
Key construction management functionalities
Scheduling

Performance
Management

Materials
management

Frontline

SOURCE: Icon team

3D model
interface

N/a

Executives

Users Project
management

Doc mgmt/
Info sharing

N/a

N/a

58

CAPITAL PRODUCTIVITY

Icon improves site productivity by reducing not productive time

Do these sound like familiar experiences
to you?

Icons value added

Site activities are not prepared before

Each frontline manager is notified

planned start date (e.g. drawings not

ready, resources not available)

to remove roadblocks before

activity start

Site activities are not cross

coordinated because disconnected from
the masterplan

Root causes for delays are not

captured and discussed

Information from the field (e.g.

actual progress, forecast) are
captured on a daily basis and
synchronized with masterplan

Reasons for delays are

systematically collected from
each site activity on a daily basis
and consolidated into Key
Indicators1

Productivity targets are not based on

Productivity data are stored and

benchmarks and not cascaded to the

frontline

available for benchmarks.

Frontline managers have clear
target on a daily basis

Individuals are not accountable for

improvement actions (e.g. remove
roadblocks, improve performances)
1 Connection between Icons modules provided as service
SOURCE: Icon team

Actions are deployed to each

responsible and monitored Vs
target completion date
59

Contents

Perspective on Operations in China

Operations excellence impact on
corporate market value

Philips excellence in procurement and

supply chain

Excellence in other operations areas

Operations transformation enablers:

organization and capability

Key takeaways

60
65

Only relying on technical changes is risky; 70% of transformations fail

often due to people issues
Success rate of transformation
%, n = 2,261
70% of change programs fail

30%

SOURCE: McKinsey

Percent
of efforts
failing to70%
achieve
target
impact

mainly because organizational health gets

in the way
Percent

Other obstacles

14

Inadequate resources
or budget

14

Management
behavior does
not support change

33
Organizational
Health factors

Employee resistance
to change

39

61

The big idea: organizations need to manage performance and health with
equal rigor
Performance

Health

Performance outcomes
How well you are doing, e.g.,
Revenue
Profit
Safety performance

Organizational outcomes
How healthy you are, e.g.,
Accountability
Culture and climate
Coordination and control

Business processes
What you do to drive
performance, e.g.,
Business reporting
Strategic planning
Maintenance planning

Management practices
What you do to improve your
health, e.g.,
Role clarity
Shared vision
Rewards and recognition

Organizational structure
Roles and responsibilities
Talent
Resource allocation
SOURCE: McKinsey

62

Four core concepts need to be implemented in operations

capability building
Design concept of CCOE program

From
CEO
Perspective

Short-term solutions

Threepronged
approach

Change
management

Emphasis on
technical details
only

Seeing lean
operations as a
static process

Limited to traditional
Integrated
operation

SOURCE: China Center for Operations Excellence

lean, without
considering integrated
concepts

To

Integrating operational
transformation into the
overall strategy

Integrating operating
system, management
infrastructure and mindset
and behaviors

Seeing transformation
as a dynamic process
and emphasizing change
leadership

Links between lean, energy

consumption and other
operational functions, into
an integrated system

63

Operations excellence requires balanced action across 3 dimensions

Operating
System

Management
Infrastructure

Mindsets &
Behaviors

Operating System

Mission

Objectives

Tools and approaches

to achieve a step change
in operational performance

Achieve major improvements in productivity, overall

equipment effectiveness, ontime delivery and inventory

SOURCE: McKinsey

Management
Infrastructure
Performance management and organization
to support the operating
system and enable
continuous improvement
Ensure sustainability of step
change results and achieve
further incremental
continuous productivity
improvements

Mindsets and Capabilities

Ownership and skill for the
lean transformation on all
levels of the organization

Ensure sustainability
of step change results and
achieve further incremental
continuous productivity
improvements
64

Experiential learning is the preferred approach

for adult capability building

JUST-IN-TIME EXAMPLE
Focus in the following

Recall rate of simple learning content1

Learning by

Hearing
(explanation)
Seeing
(example)

Recall rate after 3 months in %

10

32

Doing
(experience)

65

I hear and I forget,

I see and I remember,
I do and I understand.

Confucius

1 Numbers determined in concrete example by teaching small, simple chunks of information to 3 groups
SOURCE: Whitmore: Coaching for Performance, 2002; based on IBM and UK Post Office research; McKinsey Interviews

65

Experiential learning uses a blended learning approach

Delivery

Examples

Why it matters

Forum

Academy

Free-risk environment

Theoretical content and practical

exercises to teach a single skill

Boot camp
Immersion classroom with fieldwork
Field

On-the-job
Immediate application in real-world

Exchange learning
In-the-field knowledge sharing

Feedback

Feedback based on job performance

to practice the skills

and build understanding
Peer interaction
reinforces behavior
and makes it sustainable

To apply skills adults

need 22 consistent
applications of a new skill
before it becomes
automatic

Gives the individual

practical suggestions
to improve the learning
and act on it

SOURCE: McKinsey Capability for Performance Initiative

66

Refresh your memory: Philips Procurement

SOURCE: Philips

67

We completed building our Capability Building Process

Key milestones

Reasoning

Target
Q3 2013

We defined our team..

Standardized our roles..

We standardized our Roles & Responsibilities across procurement,

in 25 Job Families, in later phase to 21 Job Families

Competency Profiles

We defined which competencies for success we need to develop in

each of our roles

Q4 2013

Q1 2014

We know who is part of our current Procurement community

Brand new
Top Team

Scientifically validated &

Externally benchmarked
Q2-4 2014

Capability Assessment

Resource to Win
through Development

Q3-4 2014

We are assessing all of our team

members against these
competencies, developing
Individual, tailored, learning
journeys for individual
accelerated growth

We created learning guides per job family

Job
Rotation
10%

SOURCE: Philips

through formal
learning

20%

through
others

70%

on the job

68

Procurement Job Family Structure: 5 Sub-functions, 21 Job

Families and 87 Jobs

5 SubFunctions

Procurement
Engineering (PE)

Commodity
Management
(CM)

Market
Procurement
(MP)

Governance

Support

21 Job
Families

PE
Business Partners

CM
Managers

MP
Managers

Contracting & Nego

Excellence

Analysts

87 Jobs

1 SSC = Procurement Shared Service Center

SOURCE: Philips

69

We have completed our competency profiles, knowing per job

family which competencies lead to success

SOURCE: Philips

70

Capability Development Priority & Insights: Growing the

capabilities which matter to each individuals success

Indicates your manager has identified these
competencies as the top two most critically
important capabilities to be successful your
role

Two strength and development areas will be

indicated based upon your overall score per
competency and the importance of the
competency as selected by your manager.
Strength areas, e.g.:
Timely Decision Making
Conflict Management

Functional competencies
Manager

Dealing with
Ambiguity
Interpersonal

Development areas, e.g.:

Intellectual Horsepower
Building Effective Teams

Self

Matrix Manager

Business Acumen

Building Effective
Teams

Conflict Management

Timely Decision
Making

Priority Setting

Motivating Others

SOURCE: Philips

Intellectual
Horsepower

71

We create Oxygen for the Procurement organization

to succeed through strong talents everywhere
Business drivers

Oxygen Cycle

Reinforcing result oriented culture

Bring in stronger Procurement
specialist capabilities into the
function, in all of our Job Families

Repositioning people inside or

outside of Philips, and by bringing
in new talents;

Based on our Capability Analysis

and Performance Stacked
Ranking programs

Reductions are performance

based, mostly not through
transformation

SOURCE: Philips

Oxygen
Execution

Capability
Analysis

.
Line
Manager &
HRBP
review

Self &
Manager
Assessment

Stacked Ranking

Management Team
collective &
calibrated ranking

72

Stacked Ranking outcome: 20% A-players, ~70% B-players and

~10% lower performers

257 (20%)
A-players

876 (68%)
B-players

162 (12%)
C-players

Grade 55 and below: Grade 60 70:

A: 31
(9%)

SOURCE: Philips

B: 262
(75%)

C: 56
(16%)

A: 152
(21%)

B: 473
(66%)

Grade 80 and up:

C: 87
(13%)

A: 68
(34%)

B: 111
(56%)

C: 19
(10%)

73

Contents

Perspective on Operations in China

Operations excellence impact on
corporate market value

Philips excellence in procurement

and supply chain

Excellence in other operations areas

Operations transformation enablers:

organization and capability

Key takeaways

74
91

Key takeaways (1/2)

Chinas economy is at a turning point operations

excellence is key to address rising cost, increasing consumer
expectations and demand volatility
Operations is a major lever to deliver value to companies
across industries both to increase profitability and to enable
growth
Operations excellence comprises two dimensions an
advantageous strategic footprint and superior execution
excellence (applying classical and digital tools)
Superior execution is the backbone of excellent operations
requiring a strong operating system, a rigorous
management system, and strong mindsets & capabilities
embedded
in the organization

Experiential learning is the preferred approach

for adult capability building allowing to make improvements
sustainable and scalable

75

Key takeaways (2/2)

Several levers can be pulled to capture the full value of
operations:
Procurement integrates into the end-to-end value chain of
external and internal suppliers, using DfX, TCO, value
engineering, competitive tear down, clean sheets, etc.
cross-functionally with Marketing and R&D
Excellence in the supply chain requires collaborative end-toend planning, supply chain segmentation, moving the global
footprint closer to customers, and digital tools
Increasing volatility (e.g. market demand, disasters, currency
fluctuations) requires agile operations, advanced lean
(focusing strongly on inflexibility and variability reduction), and
Industry 4.0 tools as major strategic levers
Resource Productivity Operations use Energy efficiency
and Value-in-Use concepts to maximize the output per unit
energy and material input
Achieving high Capital Productivity requires full leverage
of the China supplier landscape, optimized and lean
space/spec requirements, as well as rigorous performance
management
76

The key to success in the new environment is becoming efficiency-driven,

through application of operations excellence tools discussed today
DtC, DtV, DfX
Modular strategy
Engineering driven

Labor productivity and

Product
development

product ideas
R&D excellence

Advanced
Manufacturing

Ops
Procure- Excellence Capital
producment
tivity

"Make or buy
Supply and contracting

Supply
chain

strategies
Supplier selection
and development

Demand sensing and shaping

Inventory strategies
End-to-end planning, forecasting
Logistics optimization
Supply chain 4.0

flexibility
Ramp up/down capacities
Process design flexibility
Resource productivity
Innovations / Industry 4.0

Lean capex
Lean construction
Asset footprint
Asset flexibility

Operations
transformation and
capability building

77
94

Questions for your learning log

1 Looking ahead, what do you consider the biggest operational
challenges for companies in China? Which sectors will see
the strongest pressure?
2 Among the levers highlighted for operational excellence, which
are most relevant for businesses in China from your perspective?
How do you rate the relevance of operations excellence vs. other
value creation levers?
3 What are examples of particularity strong operations companies
in China and what makes them distinctive? What are examples
of companies that struggle with operations excellence and what
are root causes?
A personal bonus question:
How important is operations knowledge and capability for your
personal agenda? What will you do to develop your operations
insights and capabilities as a future business leader?
78