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Kone Corporation Is A Finish Company Marketing Essay

Introduction

The objective of this project is to apply the theory learnt during our supply chain management course to the Koné's current supply chain.

Generalities about Koné 

In a few words Koné Corporation is a Finish company. It was founded in 1910 and it is currently the 4th  largest manufacturer of elevators worldwide (after Schindler, OTIS and ThysenKrupp), a leading manufacturer of escalators, and also provide maintenance services and modernization solutions. In addition Kone builds and services automatic doors and gates. In France there are the 3rd largest manufacturer of elevators (14% of the market), after OTIS (48%), Schindler (19%) and before ThysenKrupp (10%)

 

Koné Corporation stocks are quoted on the Helsinki stock exchange since 1967. In 2007, Koné net revenue was 4,1 billions euros (180 Million euros of profit) and they had 32 500 employees.

 

Since 1924, Kone been owned and operated by one of Finland's wealthiest families, the Herlin family. The current Chairman of Kone's Board of Directors from 2003 onwards is Antti Herlin.

Koné History

 

1910-1964

 

Kone was founded in 1910. After World War II, Kone was called upon by the Finnish government to contribute elevators, electric hoists and cranes to the war reparations. This program forced Kone to expand its capacity, rationalize production processes and learn to meet demanding manufacturing schedules. In the 1950s Kone introduced its first group controls, automatic doors and hydraulic elevators.

 

1965–1998

 

Kone opened a purpose-built elevator factory in 1966 in Hyvinkää, Finland. The following year Kone was listed on the Helsinki Exchanges and started its international expansion through the acquisition of Sweden's Asea-Graham and its Norwegian and Danish affiliates. Numerous acquisitions followed during the 1970s and 1980s.

 

In 1981 Kone entered the American elevator market with the acquisition of New York City based Armor Elevator Company, which it continued to operate independently as a wholly owned subsidiary.

 

From 1987 to 1990, there was a global recession which forced Koné to sell a lot of its activities.  Only its elevators, escalators, and automatic door branches remained. Kone acquired Montgomery Elevator Company of the U.S. in 1994, and a majority of shares of O&K Rolltreppen GmbH of Germany. These acquisitions made Kone the world's leading supplier of escalators and autowalks. In 1998 they invest in the construction of an elevator and escalator factory in Kunshan, China.

 

In 1996 the company introduced new technology such as the Kone EcoDisc hoisting machine and the Kone MonoSpace elevator technology concept. Kone was one of the first to introduce machine-room-less construction in elevators. At the beginning of the 21st Century, due to the apparent benefits of Kone's pioneering elevator systems, rival companies began to follow this trend.

 

1999–2007

 

The company faced several problems due to an unexpected slowdown in the elevator industry. Furthermore, worldwide economic downturn reduced construction activity, and modernization of elevators in aging buildings has been slower than predicted.

 

Unlike the elevator business, the automatic building door service business had not yet experienced such problems. Kone made a few strategic acquisitions and alliances and soon became the leading company in the field.

 

In 2004 the Kone Board of Directors presented a plan to split the company into two separately companies. One company would comprise Kone's existing elevator, escalator & building door service business and continue to operate under the name Kone Corporation. The other company would comprise Kone Cargotec’s business area and operate under the name Cargotec Corporation.

 

Also in 2007, it was announced Kone had received part of the largest fine ever handed out by the EU Commission for massive and extensive price fixing potentially going back decades. The crime was seen as especially severe as the cartel activity focused on maintenance required by law, and thus related to the safety of elevator users. In total, the industry received 1 billion EUR fine for cartel activity across Belgium, Germany, Luxembourg and the Netherlands.

 

Finally, in 2007, Kone announced that they would stop production of hydraulic elevators, due to their inefficient energy consumption, contamination concerns regarding the use of hydraulic oil and buried cylinders, and other environmental concerns. Therefore, Kone has become the first major brand elevator company to make only traction elevators.

 

 

Koné locations

 

Koné has a global presence all around the world. The company provides local service for builders, developers, building owners, designers and architects in 50 different countries where they own 8 production units on their main market and 7 R&D centers. Koné head office is located in Espoo (Finland). They have around 800 services centers. Koné splits the world in three areas: Europe, America, Asia/Pacific.

 

 

Koné production

 

Each year they produce around 30 000 news lifts and escalators and they provide maintenance for more than 570 000 appliances and 270 000 automatic doors.

 

They have 3 different businesses :

Installation

Modernization

Maintenance / Service

 

In 3 different industries :

Elevators :

Koné MonoSpace, the first lift without engine room

Koné MaxiSpace, which offer between 30 to 90% more space

Koné GuideOn, computerized people management.

Escalators

Kone InnoTrack, rolling sidewalk

Doors/Video :

Koné Vauban, a portal

Koné market position

 

The lift market for installation, maintenance, reparation and modernization was around 33 billion euros in 2007. The corresponding escalators market was around 2 billions euros. And finally the market for automatic building door service amounted to roughly 5 billions.

 

Koné market share was 12% on the market of elevators and escalators. The repartition in percentage of their sales is:

 

45% about new equipments (installation and modernisation)

55% about service (maintenance). They maintain approximately 650 000 elevators and escalators.

 

 

About the localisation of their sales, they are mainly localized in Europe.

 

 

 

 

 

 

 

 

 

 

 

Significant alliances and acquisitions :

 

1985 – the acquisition of Montgomery Elevator's Canadian subsidiary opens an alliance with Montgomery in the U.S. that leads to the total integration of Montgomery into the Kone organization after 1994.

1995 – an alliance was formed as Kone and MacGregor worked together to create elevators for handling passenger traffic on modern cruise ships. This alliance commands the leading position in marine elevator market.

1998 – Kone's alliance initiated with Toshiba of Japan.

2001 – Kone-Toshiba alliance is strengthened as the companies signed a historic agreement to exchange shares and extend Toshiba's license to market elevators based in Kone MonoSpace technology.

2002 – Kone acquires the industrial engineering company Partek

2007 – 25 small elevator service companies to increase its service density (Europe and North America)

1°) Mapping of the supply chain

 

This is the overview of the Koné overall supply chain

a°) Map of physical flows

 

As we have seen previously they have 3 different businesses :

Installation

Modernisation

Maintenance / Service

 

In 3 different industries:

Elevators, divided in 2 different kind of market :

standard building → A Process

architect → dedicated order (big impact on their reputation) → C Process

Escalators

Doors/Video :

 

If we show the main processes of Koné in a matrix:

 

 

Installation

(new equipment)

(100M€)

Modernisation

(200M€)

Maintenance

(200M€)

Elevators

(500M€)

3 Regional factories :

Asia/Pacific

Europe

US

For A process (standard, equipment in maintenance)

 

+ 1 for special equipment in Finland. For C Process (big lift “sur mesure” orders)

1 Warehouse / Region : Singapore, Germany, US

Possibility of 24 hours in case of urgency.

Main goal: having the part available in the van. In France they cannot charge the customer for reparation, must be included in the service package.

 

They have to minimize the time and they try to not have to come back (loose of money) → Need materials in the Van → They have to choose them dynamically (trade off between sleeping stock and material they will need). In France they cannot charge the customer for reparation (contract with minimum package).

Escalators

1 factory in China → expedition in 2 containers/

No modernisation, replacement only.

Doors

(60M€)

 

 

Because the elevator market is the Kone main market and because of the likeness between the processes of installation and modernization we will focus mainly on the Modernization supply chain of an elevator. This happens when a customer needs to change parts of his lifts.

 

There are 2 kinds of processes:

 

A Process

Usual elevator

C Process

Special elevator

1°) Quotation to customer without verification.

 

They often make quotation mistakes but they know approximatively their margin of error and it is taken into account in the price.

 

The main difficulties are :

Sometimes what was quote as A Process becomes at the end C Process.

Technicians need to come back several times before finding the right components.

 

Life cycle in average: 20 years to change every components. In France laws are drastic → High level of safety requested by law.

1°) Need to go on site → dimension, etc... to make the quotation

 

They sell a function not a piece of equipment (ex a speed, a color, etc)

2°) Order

 

A technician defines by his own the parts needed

2°) Order

 

Need the use engineering parts

 

3°) Salesman and technician check which product to use.

 

99% of time a technician come back and check material to use and order (order review, to be sure not to forget something to satisfy customer).

 

4°) Administrative, engineer department

 

They translate the needs in order to different vendors in their supply chain and with their external vendors

Time to deliver the final product : around 10 months

 

 

 

 

 

 

Which we can resume in 3 different phases:

 

Modernization

Branch→Engineering

Logistic and consolidation time

Installation of lift

Customer order

4 to 25 weeks

Purchase Order

8 to 15 weeks

 

The main difficulty of the purchased order management is to give the global picture to everybody. Actually each actor of the supply chain is important to its overall success.

Installation

2 to 4 weeks

 

The beginning of the installation step has very often to be readjusted

b°) Map of information flows

 

The process of ordering and installing a new elevator (or modernizing an old one) involves several employees of Koné through these different steps:

 

The vendor which give the price to the customer

The design office, but only for non-standard product (C-Process)

The Executive specialist (order review, site relations, technicians supervising, plannification, financing). It’s the technicians’ boss.

The Central supply manager, who manage the procurement and invoice the production.

The factory (production) and subcontractors (outsourced parts)

Technicians on the site.

The adjuster who finalize and check the product.

 

2°) Competitive and supply chain strategy

a°) Competitive situation and competitive strategy

 

We can summarize Koné competitive situation in 3 points:

 

Koné’s key customers are heterogeneous and have a huge range of different needs: from builders, building owners, facility managers and developers to architects and consultants which are all key parties in the decision-making process regarding elevators and escalators.

Koné has segmented the markets according to the purpose of the building. The main segments are categorized as residential, office and retail, as well as public transportation and airports. In addition, KONE serves hospitals, leisure centers, hotels and industrial properties.

Koné has approximately 250,000 customers globally, of which the majority are maintenance customers. Maintenance contracts vary from one-elevator residential buildings with yearly contracts to large international accounts with long-term service agreements.

 

 

 

Because of this situation and the constraints of the elevator/escalator/doors market they choose as competitive strategy to focus on diversity and adaptability. They have higly customizable products with the possibility to adapt or design new one on demand. They choose also to focus on hi-tech, quality and maintenance quality level to not be overtaken by their competitors. So if we position their competitive strategy, Koné is at a middle price (in the same range as its direct competitors) with a high value added for its customers.

 

 

 

To follow this competitive strategy, its supply chain is focused on responsiveness (especially for maintenance) and flexibility. They have a dedicated product their ultimate goal is to carry no stock. It’s typically a pulled process, the customers drive the demand and they produce to orders to respond indivudally to their needs:

Challenge to plan the livery and lead time

Give the earliest possible visibility to their suppliers

 

But currently they don’t really have advantages against competitors :

Not enough differentiate with the major competitor (same level of service)

Business is changing a lot currently.

They share the market but are not very aggressive against their competitors.

 

Nevertheless they are in a pretty good position with their innovating gearless lift (copyed by their competitors now) and the lastest technologies in the elevator field.

 

 

b°) Level of uncertainty and supply chain strategy

 

The uncertainty in the elevators/escalators/doors market comes from 2 different causes:

 

The impact of customers need

Need accurate planning for delivery: In buildings project all parts are linked. So any delay will costs a lot because the other steps will be impacted.

Huge variety of products and customization: Each product is unique. Even if it is the same lift, the constraints are different.

Huge rate of innovation: Koné GuideOn, MaxiSpace and Mono space are the three big innovations. One can’t guess the demand level during the initiative phase.

High quality service level: Customer expect a high level of adaptability and responsiveness in maintenance

Response time : even though customers are willing to wait several months to see their lift build, this is a risk to Koné to be less reactive than their competitors

 

 

 

Implied high demand uncertainty

 

In addition the demand for elevators is very seasonal for 2 main reasons:

Private market is cyclic. The syndic meeting take place in April-March → orders pick in October-November.

Public market is cyclic: At the end of the year, if public budgets are not completely spent, public administrations can invest in this spare budget in buying a new lift → orders pick in September-October.

 

In a dream situation the demand fluctuation would be flatten to obtain a flat delivery all along the year and avoid problem about the bullwhip effect. But it's too difficult currently so they keep fluctuations and have to delay their delivery. Currently the seasonality isn’t really integrated. They have a view on their demand around 6-8 months.

 

The impact of supply source capability

Too many different suppliers: 4000 to 5000 suppliers in France.

Lack of forecasting and accurate feedback in materials for maintenance used. Even if Koné knows the number of lifts that belongs to their customers and that must be modernized by the “loi urbanisme et habitat”, it is impossible to forecast upcoming years. Indeed thet are not sure whether their customers will stay faithful to the brand. Even though they would forecast they wouldn’t have the capacity to produce enough.

Lack of partnerships: No strong relationship with suppliers. Only agreements with local suppliers when the supply line doesn’t have the components.

 

 

 

Implied average supply uncertainty

 

After combination of its demand uncertainty and its supply uncertainty we see that Kone has in total a high uncertainty.

 

 

They have adapted their responsiveness ability to match this uncertainty by adopting a very flexible supply chain (they make the product after receiving the order).

 

 

 

 

They manage to create a Supply Chain Strategy which fit with its Competitive Strategy.

 

 

Functional / Stable demand

Innovative / Uncertain demand

Efficient

Match

Don’t match

Responsive

Don’t match

Koné manage to adapt is Competitive Strategy to its Supply Chain Strategy

 

c°) Evolution in the future. Is the company able to achieve a strategic fit between its competitive and SC strategy ?

 

In the current situation with the crisis the main differences between Koné and its competitors:

Main critera is the price.

By law: 3 different quotations.

Environmental aspect (electricity level/certification along supply chain)

Level of contract

 

Even if there isn’t really invention in the lift field but only improvements, like for example:  gear less lift, new signalisation or design, Koné invest a lot in R&D, around 50 million euros each year (which represents 1.2% of net sales). The test center at Tytyri allows them to propose innovating and competitive solution for their customers compare to the market.

 

About the future they follow a new strategy since 2007

 

Based on the expected growth of the urban population, new opportunities of development appear. They have to understand the customers’ needs and create unique ways of solving the problems of people flow. Their actual and future challenges are:

More buildings and more people in them

Congestion and crowding

Environmental issues

Successful urbanization is a prerequisite for economic growth

 

Growth of the rural and urban population of the world

 

Number of mega cities over 10 millions people

 

 

Today objective is to offer best people flow experience by developing and delivering solutions that enable people to move smoothly, safely, comfortably and without waiting in building in an increasingly urbanizing environment.

 

 

3°) Analysis of drivers of SC performance

 

In this part we will analyse the Koné structure in terms of responsiveness and efficiency.

a°) Facilities

 

Elevators

Escalators

Doors

3 Regional factories in Asia/Pacific, Europe and US

+1 for special equipments in Finland

1 factory for elevator engine.

1 factory in China to assemble them.

2 factories in Italy and Tcheky

3 Warehouses : Singapore, Germany and US.

 

They have also 1 facility for French market (for regulation purpose) which is Procodiss for material not deliver by normal supply chain unit.

b°) Inventory

 

In France they have more than 1 000 spare components and more than 20 000 stock references in warehouse inventory. Some of them (especially very expensive, unusual) are just in the regional warehouse.

 

Their way of stocking:

 

They have a regional warehouse → Depots (proximity stock: heavy, expensive, fragile material) → Van (they are mainly focus on it). Big customers have also often material in stock: customer or Koné ownership. Their inventory level has 5% turnover of customer service.

 

Their main need is to have all the materials on site at the correct time (ex: 10 vendors, each product has a different lead time) → consolidation centre at the region level. They have different localisations for warehouse, in France consolidation take place in Paris → they manage to obtain products at the last time not to pay the stock → Then 1 truck deliver all the material for required for the modernization process.

 

 

Their usual lead time is around 1 to 2 years between the first decision to the final product. They can’t be late (building not ready else). It’s the same thing for installation of a new lift but the process is more accurate, more elaborated and more mature.

 

 

 

 

 

Their replenishment policy is:

on request

normally each material should be back ported when it is used, but not really applicable because of a lack of back porting by the employee currently.

So, they have no forecasting for spare parts. Their stock vans are all different (standard template in the beginning and then adapted by the fitters). They need an accurate backreporting to improve this field. Their goal is to have less stock possible to increase their visibility :

order earlier they can

material later they can

c°) Transportation

 

Their transportation network use mainly trucks and is subcontracted (outsourced). Nowadays Koné works with Panopa while in the past it was with TNT. In Paris where transport for maintenance is in sourced (last miles transportation). The only exceptions are :

Boat from china

Airplane for urgent components

They never use train because of the cost and too expensive and the most import-ant level of planification required. Koné owns 3 000 cars in France and 13 000 all over the world.

d°) information

 

There information network isn’t so much developed. They use direct orders for materials with their suppliers :

not very much integrated → Just an internet catalogue integrated in for their 30 mains suppliers. Even if they don’t have yet any kind of global and close partnerships with their suppliers they currently try to improve this field by putting in place new contract with them. They focus of the “strategic” suppliers (which one who can give them competitive advantages in cost, innovation, etc..) or with ones who have a huge importance on the quality of their products or services. Since 5 years ago they manage to buy their supply more globally and less locally.

commodities / car fleet management / insurance / etc... are purchased only in a buyer/seller relationship without any partnerships.

 

About their customers they know the standard lead-time and until when their customers are able to change the date of beginning. The last time where the day of beginning must be fixed is the non return point (NRP), based on lead-time (ex 10 months). After this date the day of begin to assemble is definitively fixed (but involve problem of planning when NRP is too early). About their strategic customers they are used to established partnership (ex : aeroport de Paris) who are integrated with specific contract.

 

It’s also important for them to make their employees go to the global supply chain process.

 

 

 

 

 

They also have an important computer system:

SAP

Salesforce.com, which give them more visibility on their vendors activities. That allows them to share customers informations easily: the customer is a customer of the company, not only a customer of a vendor.

a specific system to manage their call centres

data basis of their materials and equipments to help them for quotation.

e°) Sourcing

 

Their current overall strategy is to move from local sourcing to global sourcing. They also outsourced a lot the transportation.

Their goal is not to rely on raw materials price fluctuations that are why they used fixed price agreement with their suppliers. The risk is transferred to their suppliers.

f°) Pricing

 

They don’t have special policy about their pricing but only a fixed price during the entire year without any kind of promotion or discount period.

 

The cost of a high end elevator is between 50 000€ to 1 M€ depending on its performance but also on the architect choices (materials, etc). A standard elevator is around 30 000€

4°) Overall recommendations

 

Based on our analysis we think that they should improve a few key points which could have a great impact on their overall supply chain. The 3 main key points we have identified and where they should focus in our opinion are :

The integration with their suppliers. By setting-up close partnership with them.

The reduction, rationalization, tiering, and globalization of their suppliers. Having fewer suppliers, but more global and better integrated.

Improvement of the forecasting for their van inventory. In particular by having and applying a clear policy of backreporting about the materials used in maintenance.

According to Bruno Demange during the quotation and site visit steps technicians should spend more time estimating the right components to modernize the lift. Indeed sometimes they forget administrative documentation, data (measurement) and even more detrimental data. That’s why they have to come back and repeat the process.

Involve employees and particularly technicians in the company overall success order to motivate them to do a work well done.  to motivate them to do a work well done.

 

 

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