Supply Chain Research Project Kone Corporation Marketing Essay

Abstract

In this research project we analyse the supply chain of KONÉ Corporation who are the 4th largest manufactures of elevators worldwide. We study their market position, sales and map their physical flows, information flows of the supply chain. We examine how they align their competitive strategy with their supply chain strategy. We also analyse the different drivers of inventory, transportation, information, sourcing and pricing in KONÉ’s supply chain. In this report we also draw attention to the risks which impact KONÉ and offer recommendations to overall efficiency.

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 

Koné Corporation is a Finish company. It was founded in 1910 and it is currently the 4th largest manufacturer of elevators (after Schindler, OTIS and ThysenKrupp), escalators and also provides maintenance services and modernization solutions worldwide. In addition to this, Koné also produce and service automatic doors and gates. In France they 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 2010, Koné’s net revenue was 4.1 billion euros (180 Million euros of profit) and they had 32 500 employees.

Since 1924, Koné has been owned and operated by one of Finland’s wealthiest families, the Herlin family. The current Chairman of Koné’s Board of Directors from 2003 onwards is AnttiHerlin.

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 has not yet experienced such problems. Koné made a few strategic acquisitions and alliances and soon became the leading company in the field.

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

In 2007, it was announced that Koné had received part of the largest fine ever handed out by the EU Commission for massive and extensive price fixing. the cartel activity focussed on maintance which was related to safety of elevatoe users.This was made mandatory by law.Koné faced a fine of total of1 billion EUR for cartel activity across Belgium, Germany, Luxembourg and the Netherlands.

Finally, in 2010, Koné 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, Koné has become the first major brand elevator company to make only traction elevators.

Koné locations

Koné has a global presence all over 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 in Hyvinkää, Finland; Pero and Cadrezzate, Italy; Ústí nad Labem, Czech Republic; Essen, Germany; Kunshan, China; Chennai, India; Torreón, Mexico; and Coal Valley and McKinney, USA and 7 R&D centres. Koné head office is located in Espoo (Finland). They have around 800 services centres. Koné splits the world in three areas: Europe, America and Asia/Pacific. Nearly 3,000 people work for KONÉ engineering and production operations worldwide.

Koné production

Each year they produce around 30,000 news lifts and escalators and 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

KonéInnoTrack, 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 2010. The corresponding escalators market was around 2 billion euros. And finally the market for automatic building door service amounted to roughly 5 billion.

Sales 2010

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

45% about new equipment (installation and modernisation)

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

Sales by Market, 2010

Mapping of the supply chain

This is the overview of the Koné’s overall supply chain

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

The elavator market is the main focus of KONÉ. Due to the likeness between the processes of installation and modernization we will focus mainly on the modernization supply chain of an elevator.

There are 2 kinds of processes:

1. Process A

a) Quotation to customer without verification.

In this process they do not make accurate quotation but they do take into consideration their margin of error while stating the price.

The major difficulties they face in this process are:

Sometimes the quotation made as process A ends up being process C.

Technicians are required to come back several times before they can find the right product.

As per regulations in France, average life cycle of a component is 20 years. The laws are drastic and high level of safety requested by law.

b) Order – the technician decides which parts are required.

2. Process C

a) Quotation made On-site visit

In this process the technicians are required to go site to get the specification on dimensions etc to make quotation.

b) Order- They are required to use the engineering parts.

In both process A and process C:

Salesmen and technicians cross check the products. 99% of the time the technician checks the material to use and order (order review, to be sure not to forget something to satisfy customer).

Administrative and engineer department takes over and translate the needs of the order to the different vendors in their supply chain and with their external vendors.

To deliver the final product it takes around 10 months. This can be divided into 3 different phases as shown below. 

Customer order

Purchase Order

Installation

4 to 25 weeks

8 to 15 weeks

2 to 4 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.

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

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, gives 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, planning, financing). It’s the technicians’ boss.

The Central supply manager, who manages 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, KONÉ serves hospitals, leisure centres, 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 highly 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 individually 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 (copied by their competitors now) and the latest technologies in the elevator field.

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 “loiurbanisme et habitat”, it is impossible to forecast upcoming years. Indeed they 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 Koné 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

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 criteria are 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 centre 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  

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.

Analysis of drivers of SC performance

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

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.

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 decisions 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 back reporting to improve this field. Their goal is to have less stock possible to increase their visibility:

order earlier they can

material later they can

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 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 planning required. Koné owns 3 000 cars in France and 13 000 all over the world.

Information

Their 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: airport of 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 vendor’s activities. That allows them to share customer information 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.

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.

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€

Conclusion and Recommendation

Based on our analysis on the different sectors of the supply chain. We have come up with some suggestions which could help optimise their processes and impact on their overall supply chain. On the procurement aspect we suggest that they establish close partnership agreements with their suppliers and integrate them into their procurement process. They must reduce the multi tier of suppliers they have and focus on rationalization and globalization of their suppliers. They could aim on having fewer suppliers, but more global and better integrated. On the inventory area they can improve on their forecasting practises for their van inventory. In particular by having and applying a clear policy of backreporting about the materials used in maintenance.

According to the employees, during the quotation and site visit process, technicians should spend more time estimating the right components to modernize the lift. There must be stricter procedures to file administrative documentation, data (measurement) and even more detrimental data. The lack of doing so results to repetition of the process which causes delays. Employees (particularly technicians) must be involved in the company’s success in order to motivate them to work well.