Prsentation til: NilfiskAdvances bestyrelse

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Outsourcing through partnering and core
competencies Forum for driftsteknik December 8,
2004
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Purpose Content
Purpose 1. Provide overview over strategic
direction 2. Give case examples 3. Provide ideas
for further outsourcing

• Content
• 1. Nilfisk-Advance strategic direction and link
  to outsourcing
• Case examples
• King outsourcing
• Development outsourcing
• Lessons learned
• Future outsourcing direction

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Nilfisk-Advance in Brief

• Global leading supplier of professional cleaning
  equipment
• Complete product portfolio for institutions,
  contract cleaners, industries and to private
  households
• Global presence, 31 N-A sales companies and
  importers in all other markets
• Product development and manufacturing in Denmark,
  Italy, China, Hungary, Sweden and USA
• 3,800 employees (2004)
• MEur 630 in total sales (2004)
• Member of the NKT Group

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Product Groups Within Nilfisk-Advance
High pressure washers
Vacuum cleaners
Floor care
Other
30 of turnover
40 of turnover
20 of turnover
10 of turnover
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What Do We Source Outside Nilfisk-Advance
100 Total COGS base (Incl. development)
Overhead in Production Co.s
Material/machines/process sourced from 3rd party
Direct labour

• No in-house production
• only assembly
• Sourcing of finished products
• from contract manufactures has
• increased from 1 to 5 over the
• last 5 years
• Some process costs (development)
• placed outside Nilfisk-Advance

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5
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Key focus is to have long term sustainable
partners and to be one
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Nilfisk-Advance Strategic Direction and
Statements on Sourcing Strategy
Strategic Direction for Production
Statements on Sourcing

• Assembly
• 100 quality
• Flow/Lean
• CC5 program

• Nilfisk-Advance should have an assembly set-up
  and leave production to 3rd party partner
• Core knowledge on products and technologies
  should be kept within Nilfisk-Advance
• Build on partners competencies and volume (cost
  advantage) and Nilfisk-Advance act as the spider
  in the web

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Consequences of Strategic Direction
2000
1996
Basic outsourcing
Process outsourcing
Partnering around core competencies
What

• Plastics
• Motors
• Welding
• Painting

• Integrated parts
• Full machines
• Development

• Cost reduction
• Complexity reduction
• Become an assembly firm

• Next level cost reduction (CC5/volume)
• Nilfisk-Advance core competence is quality
  understanding
• Speed in development production
• Flexibility
• Simplification/reduction of complexity

Rationale
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Evolution of COGS Split
100 Total COGS base (Incl. development)
Strategic outsourcing direction has fundamentally
changed Nilfisk-Advances cost structure
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Approach to Outsourcing and Partnering
Key parameters for outsourcing
Nilfisk-Advance requirements

• Industry leading
• Process set up superior to Nilfisk-Advance
• International business experience

Partner competencies

• Visionary
• Growing

Flexibility

• Volume significant higher than Nilfisk-Advance
• Connection to/situated in low cost areas

Volume/cost advantage

• Ability to enter into long term contracts and
  stick to them
• History of sustainability

Long term relationship
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Outsourcing of a Complete Machine 2001

• Challenge
• Complex machine
• Own production site build on King volume
• Need for new model
• Life time left 2-3 years

• Identified requirements to supplier
• International player with volume
• Access to low cost production
• Project management and technical skills
• Well respected and trust worthy

Nilfisk King
Need for contract manufacturer with whom long
term relationship can be formed - New
developments - Sourcing of OEM products

• 15 year old platform
• Top of the line product
• Pressure on market prices

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Outsourcing of a Complete Machine 2001
Short list of potential partners

• Selection process
• Visits/due diligence reviews over 2 months
• Test of existing products
• Extensive contract
• Relationship building
• Bidding process
• Horse trading

• Had sourced OEM products in 2-3 years
• Technical cooperation existed
• Large international player
• Cost philosophy based on obtainable market price
• New to Nilfisk-Advance
• Technical competencies and size as Source 1

Source 1
Source 2

• Source 2 selected
• XX cost saving
• Fast transition
• Close DK production

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Outsourcing of a Complete Machine 2001
Year 1
Year 2 - 3
?

• Prices up
• Delivery security down
• Willingness to cooperate/adhere to contract
  decreased

• Outcome 3 year after
• Costs down with YY
• Reduced complexity
• Burdensome process
• No further co-opera-tion with Source 2

Change in management/ line personnelat Source
2

• Lessons learned
• If process and Q-check found OK, outcome will
  give substantial benefits
• 2. Know partners actual business conduct
• Be careful not to push too hard on price
• Ensure effective handover during personnel changes

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Outsourcing of Development 2000 - 2004
Competence Wheel
CAD/CAM

• Nilfisk-Advance Focus
• 1. Where does Nilfisk-Advance have core
  competencies?
• How do we ensure a speedy and cost efficient
  process?
• How do we avoid to pass on proprietary knowledge?

Product testing
Design
International project management
New technologies
Product idea generation
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Outsourcing of Development 2000-2004
Examples of outsourcing
Benefits

• Access to first tier designers
• Run projects in parallel
• Diverse input (from different designers)

Design of machine

• Findings in 2004
• Project management is core to success
• Higher speed in development
• Relative lower costs in development
• Necessity to apply Nilfisk-Advance competencies
  during the process

• Run more projects (x3)
• Ride on the back of other (non Nilfisk-Advance)
  projects

Full machine development

• Nilfisk-Advance demands being fulfilled by
  supplier
• Get newest technology
• Technology fit Nilfisk-Advance products

Motor design/development
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Lessons Learned From the Nilfisk-Advance
Outsourcing 1998-2004
Key lessons learned
Competencies

• Need to understand the suppliers competencies in
  detail and be critical
• Nilfisk-Advances main contribution is project
  management (time plan and follow up)
• Using partners in production and development has
  made the Nilfisk-Advance organisation more
  flexible
• - Able to move production fast
• - Able to change direction when needed
• - New products on the market faster
• Cost advantages does exist, however, ensure that
  there is something in it for both parties
• The relationship to the partner is key not
  contracts

Flexibility
Volume/cost advantage
Long term relationship
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What Will the Future Bring for Nilfisk-Advance
Outsourcing

• Continue with full machine/unit production
  outsourced a way to support growth
• Development focus moving more towards project
  management Nilfisk-Advance will be the spider
  in the web
• The small world will lead to more outsourcing
  to Eastern Europe and Asia/Pacific
• Growth and move to new markets will require that
  we from time to time insource processes both in
  assembly/production and development

• Outsourcing will continue to support
  Nilfisk-Advance growth and earnings
• Ability to adopt to changes in the
  environment is a key to a successful
  outsourcing and partnering strategy