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Unformatted text preview: OPERATIONS AND LOGISTICS
STRATEGIES. ___________________________ CASE STUDY: SKF BEARINGS
Focusing factories and new
logistics chain in Europe.
Document published exclusively for this course / seminar.
It is not permitted reproduce it totally or partially without permission.
Document publicat per a ús exclusiu d’aquest curs/seminari.
està permès reproduir-lo totalment o parcialment sense permís. No Documento publicado para uso exclusivo de este curso/seminario. No está
permitido reproducirlo total o parcialmente sin permiso. Faculty: PhD. August CASANOVAS
1 CASE STUDY: SKF BEARINGS
Focusing factories and new logistics chain in Europe. QUESTIONS ON THE SKF CASE:
1. What were SKF's strong and weak points in the early eighties? What threats
andopportunities were the company's European operations facing? 2. Analyze the principal actions taken by Michel Savonasac between 1986 and 1990as
part of his "Project to Focus SKF's European Factories". 3. As described by the SKF case, Mr. Savonasac between 1986 and 1990 took no
actionREDUCING THE NUMBER OF REFERENCES, or COMMONALITY in the design of
a. - Why?
b. - What has been the differential impact on project benefits during that period if it had
carried out such actions? 4. What other actions would you recommend that Michel Savonasac take during thenext
four years (1991-1994) in order to complete his "Project to Focus the GlobalLogistics Chain
Describe the working methodology, the kind of organizational form, the internal andexternal
trade-off, and the length of time necessary to implement each of the actionsyou propose. 2 CASE: SKF1
FOCUS THE GLOBAL LOGISTICS CHAIN IN EUROPE 1. INTRODUCTION
1.1. A brief history of SKF
largestbearingmanufacturers,wasfounded in Sweden in 1907. The company's most
important factory has always beenin Gothenburg (Sweden).
By 1910 SKF sales offices had been set up In France and Germany and agents had
beenappointed as far apart as Helsinki and Melbourne. Subsidiary companies had also
beenset up in the United Kingdom and the United States.
The first UK factory opened in 1911. The first German and French plants opened
in1913. In 1916, SKF bought its own steelworks in Malmó (Sweden). The
rapiddevelopment of the USmotor industry led to the setting up ofSKF's
firstmanufacturing company in the U.S.A. at Hartford, Connecticut in 1916.
The companycontinued to expand in theyears between the twoworldwars,
buyingoutanother competitor in the United States and opening a second factory in
The SecondWorldWar brought a halt to SKF's expansion and like other
internationalengineering groups; SKF was placed on a war footing. The task of getting
back tonormal after five years ofwarwas formidable, although SKF's positionwas
probably noworse than that of other international groups at the same time. SKF's
German factorywas in ruins and the French plants had also been badly bombed. 1.2. Increasing competition
Competition in the early 1960s was becoming even fiercer. SKF decided to
strengthenits Common Market operations.Thiswas partly achieved bythe 1965 take1 SKF Case: Case adapted from data of the company SKF and prepared by Professor August
This case has been prepared as a basis for academic discussion and not as an illustration of
management, adequate or not a given situation of a company or persons.
Published exclusively for the author use. Not allowed to reproduce without the express
permission of the author.
© Reproduction, duplication, redistribution and / or sale of all or part of the contents of this
document, or even quoting the source, except with prior written consent CASANOVAS August.
Copyright © 2000 August CASANOVAS. All rights reserved.
3 over of RIV,an Italian bearing manufacturer with ten plants in Italy, one in Pamplona,
Spain andanother in Argentina.. A decade later, RIV-SKF had 67% of the Italian
bearing market.During this same period the French SKF company had begun
expanding, partly tomeetthe needs of its own increasing exports. Two new subsidiaries,
Les Applications duRoulement (ADR) and RKS were performing well even before SKF
France purchasedmajor interests in Technique Integrale (TI) and Compagnie Genérale
du Roulement (CGR).
Throughout the 1960s and 1970s, SKF continued purchasing companies in both
thebearing and other businesses (steel mills and steel casting). Despite the
diversification of interest, roller bearings still accounted for 70% of SKF's business in
1980. 1.3. International global markets
In 1985 a corporate audit of SKF's position in the European bearings industry revealed
that the company was a fragmented organization, consisting of six separate and
largelyuncoordinated SKF companies with commercial and manufacturing operations
inSweden, Germany, the United Kingdom, France, Italy and Spain. SKF had a total
ofeleven manufacturing plants in these six countries. These six SKF companies
suppliedthe twenty SKF sales companies located in European countries where SKF did
not haveproduction plants.
SKF had a strong position in the market, partly because the company had developed
anextremely broad product range (50,000 models or references) to cater for
theircustomers' every need. Many of these were low volume products, tailored for
thespecific requirements of individual customers.
In the early eighties, Japanese companies began moving into the European market
andcompetitive pressure on SKF became even stronger than before. Two of Japan's
largestmachinery manufacturers, Fuyo and Sumitomo, invested tremendous amounts
in bearingcompanies like Koyo Seiko, NSR, Tsubakimoto Precision Products and many
others. Thesize of these investments meant that the Japanese manufacturers could
apply anaggressive pricing policy when breaking into the European market.
The Japanese manufacturers used the line production system. This meant that
theyproduced high volumes of each reference or model. Their production costs
weretherefore much lower than those of SKF. Although the Japanese sold fewer
variants(only 10,000 compared to SKF's 50,000), they were able to sell products of
equivalentquality at prices equal to SKF's manufacturing costs.
SKF Europe therefore had to make some major changes in its strategy. 4 2. STARTING THE PROJECT TO FOCUS THE GLOBAL LOGISTICS CHAIN
2.1. The current situation
As a result of the 1985 corporate audit, Andrew Mardon, President of SKF
Europe,decided to hire Michel Savonasac as Vice-President of Production, giving him
completepower over European production operations in an attempt to find an effective
solutionto SKF's lack of cost competitiveness.
Michel, the son of Polish refugees who had come to France during World War II,
hadpreviously worked for France's leading automobile manufacturer, where he had
heldvarious executive positions in the production area.
It is now April 1990 and Michel Savonasac is preparing a report for Andrew
Mardon,detailing the outcome of the project he had designed and implemented in the
productionarea of SKF's six European Divisions -Sweden, West Germany, United
Kingdom, France,Italy and Spain - between 1986 and 1990. He is also considering
what actions shouldbe taken as part of the next four-year plan (1991-1994).
The project Michel proposed in 1986 dealt with issues such as manufacturing
locationsand capacities, allocation of products to the different factories and the
technologyemployed and was entitled "PROJECT TO FOCUS SKF's EUROPEAN
FACTORIES". 2.2. Developing the project
When the project got underway in 1986 the company was manufacturing and
selling50,000 variants of bearing. In principle each of the six European
companiesmanufactured all bearing lines, families, types, sizes and models for their
own markets. This meant that a given bearing could be manufactured in up to eleven
differentfactories located in six different countries. This marketing necessitated the use
of lowvolume, batch production (discontinuous process).
In 1986 Michel Savonasac commissioned company departments and outside
consultantsto conduct a number of urgent studies that would enable him to investigate
thesituation. One of the studies revealed that a central reason for the lower prices of
theJapanese products was their overwhelming cost advantage brought about
througheconomies of scale in the production process. The Japanese, it transpired,
wereproducing fewer references for Europe - about 10,000 - but in much greater
However, the Japanese competitors had to maintain important safety inventories
inEurope in order to assure the customer service level and avoidtrouble caused by the
long freight leadtime, the supply frequency and the risk oftransport delay.
The traditional basis for SKF's manufacturing was batch production, whereas
theJapanese manufacturers, who produced far fewer variants, used line
5 productionmethods. This gave the Japanese a greater advantage in terms of
curve. 6 Labor cost per unit
(index) Another study examined labor costs per production unit and quite clearly revealed
theproblem there. The major finding of this study is represented in figure 1: SKFGothemburg FAG Alemania NSR Japan AverageRunlength per Refrence Figure 1. Run Length and Labor Productivity Michel was aware that if the "Project to Focus SKF's Europeah Plants" was to
combatthis loss of competitive advantage it would not only have to thoroughly review
thecompany's style of operations management, but would also have to prepare the
groundfor major reviews of the marketing and sales strategy, the logistics strategy,
focus theglobal logistics change, and perhaps even alter the company's corporate
But in order to keep from going off in too many directions at once and determined
towhip management into shape, Michel decided to limit the first phase of the
project(1986-1990) to the production area, which was his direct responsibility.
Using all the available data and the information contained in the reports he had
requested, Michel designed his European production strategy, developing the
followingplan of action for the first phase:
1.Cut down the number of work centers.
3.Change from a lot production system to assembly line production.
4.Improve the quality of the bearings.
7 3. PROJECT TO FOCUS SKF'S EUROPEAN FACTORIES
3.1. Cut down the number of work centers
Michel's first decision was to close down the smallest factories, whose economies
ofscale were limited and which were mainly new acquisitions, and concentrate all
hisefforts, technology, capital and human resources in the company's six
largest,strategically located, European plants (see figure 2):
• Gothenburg, Sweden
St. Etienne, France
Pamplona, Spain This decision was backed up by detailed plans to:
- Reduce the number of employees (negotiate early retirements, rescind temporary
contracts, relocate personnel within the plants, etc.)
Sell non-productive fixed assets (land and buildings belonging to the unused
Move machinery from these factories to the plants where production would be
concentrated 8 Figure 2: Location SKF six main plants.
Downsizing SKF's European operations (cutting down plants, machinery, personnel,
and working capital) translated to a major decrease in total operating costs as well as
in investments in both fixed assets and working capital. This gave Michel sufficient
credibility and funds to be able to invest in the machinery and new manufacturing
technologies he would need over the next few years. 3 .2. Concentrate production
Each of the six surviving European factories produced bearings for its own markets in
the full range of models, sizes and specifications. This meant that a single reference of
a particular bearing might be produced in as many as six different factories. There was
considerable scope here to rationalize production by concentrating the manufacture of
certain products in each one of the factories.
The aim was that each reference (type and model) would be manufactured at only one
location. In this way each factory would produce fewer types and models but greater
volumes per model.
Each factory would continue to have global responsibility for delivery to its previous
national and export markets.
The production concentration program, which was scheduled for completion by mid1988, was based on the two following basic principles:
1. Each company would retain its relative share of total European production in
order to assure equal use of machines, labor and other resources.
2. Optimum use would be made of each company's specialized technology and
This kind of concentration would mean that some of the high volume bearing types
would be produced in a number of different factories, but that each individual bearing
size or model would be produced at only one location.
The entire range of models for a bearing type with lower sales volume was normally
manufactured by only one factory.
Regular interplant truck runs were scheduled in order to replace inventories of products
not manufactured on site. 9 3 .3.Change from a lot productionsystem to an assembly line production
Production concentration means that each plant can achieve larger production volumes
per bearing model. This in turn makes it possible to further automate production
machinery and to make heavier investments in new techniques and better inspection
equipment during the 1987 - 1989 period than would have been realistic with the low
volume lot production system used up until 1985 (see figure 3). Manufacturing
Bearing Lot Production Line Production Annual Production Volume Figure 3: Comparison of cost bearing in terms of volume.
Between 1987 and 1989 many new manufacturing lines were bought, installed and
used for the production of high volume bearings.
Today the production lines are of two main types:
- "permanent lines", used to produce just one bearing model (productfocused), and - "flexible lines", used to produce a limited number of several bearing
models (process/product-focused). Certain bearing models with a lower sales volume are still produced by the lot/batch
system because the volumes are not great enough to warrant using a line production
system. But even in these cases production concentration has advantages because the
plants can more effectively plan production and improve manufacturing processes and
methods. 10 3 .4. Improve the quality of the bearings
The six factories all manufacture to exactly the same quality specifications, which leads
to high standards irrespective of the manufacturing unit.
Automated production with its new techniques and new inspection equipment gives
even higher and more consistent quality.
For example, consider the quality of a deep groove ball bearing (6205) a nd the
improvements that took place between 1986 a nd 1990. N o significant design or
specification changes for this bearing occurred during this time, so differences
can be related to the change from batch to line production. The three diagrams
showing running accuracy, vibration level and vibration peaks speak for
themselves. Runningaccuracy Vibrationlevel Vibrationpeaks 100 100 100 50 50 50 % % % P4 P5 P6 N X Q5 Q6 N X Q05 Q06 N X Producción en línea (1990) Producción en lotes (1986) N stands for normal quality. Anything to the left of N indicates higher than normal quality while
anything to the right indicates lower than normal quality. Figure 4. Quality Diagrams for ball bearing (6205) T he quality of SKF bearings is now at a very high level, and according to a
benchmarking process undertaken by an outside consulting company, rates
well against any international competitor.
T o consolidate SKF's position as a manufacturer of high quality bearings, new
specifications for design, tolerances and materials quality were also
11 i ncorporated in the Project to Focus SKF'S European Factories". Most of the
specifications are either complete or undergoing final modifications. 3.5. Results are already evident
S ince the project got underway four years ago, the new manufacturing
structure has been developing continuously. Experience has been gained from
measures already carried out and results of the six factories working together
can already be seen.
M anufacturing concentration and longer manufacturing runs have reduced
manufacturing costs, which has effectively suppressed price increases in
today's inflationary climate. But they have also resulted in reduced work-inprogress inventories, increased delivery capacity and flexibility and improved
bearing quality - all of which are direct advantages in SKF's selling activities. 4. DISTRIBUTION SYSTEM According to one of the reports requested by Michel, the current SKF distribution
network in Europe has three levels;
1. At the first level are the six SKF factories which supply the domestic markets of
their own countries and the export markets managed by the twenty sales companies.
2. At the second level are seventy sales offices (fully owned by SKF) and fifty SKF
concessionaires (financed by outside capital).
3. At the third level are one thousand five hundred distributors and ten thousand
additional sales points. All these levels hold inventories of the products in their sales range, and the cascade
system is used for replenishing inventories. Some major customers are supplied
directly from the factories or the sales companies' warehouses. 12 5. THE NEXT STEPS IN THE PROJECT TO FOCUS THE GLOBAL LOGISTICS
CHAIN IN EUROPE Despite the excellent results obtained since he joined SKF in 1986, Michel Savonasac
is aware that the move to institute a focus project in SKF's European factories cannot
stop here. He feels that if focus principles are applied throughout the entire logistics
chain the company will be able to meet more ambitious goals and reinforce SKF's
competitive position despite the introduction of Japanese products, economic
recession, the crisis in the automobile industry, etc. So far all the decisions made and actions taken have been in the field of production, for
which Michel is personally responsible. He is convinced that SKF can attain a more
competitive position in the European bearing industry if the project is taken further, but
that would require commitments from other departments of the company (Marketing,
Sales, Logistics, Purchasing, etc.) and from outside sources (customers, suppliers,
carriers, distributors, etc.). Michel is currently planning the following actions:
1. Reduce the product portfolio (number of SKUs)
2. Introduce integrated planning and new information systems in the six European
3. Introduce a European-wide purchasing strategy
4. Create distribution platforms
5. Introduce synergies on supply and distribution systems
6. Introduce organizational changes in SKF Europe Before his meeting with Andrew Mardon, President of SKF Europe next Friday, Michel
Savonasac plans to prepare a report evaluating the outcome of the Project to Focus
SKF's European Factories thus far and presenting his proposals for carrying on the
project to focus the global logistics chain in Europe in the coming years. You can help him by answering the questions on the first page. Thank you. 13 APPENDIX: WHAT IS A BEARING? TYPES OF BEARINGS, REASONS FOR CHOOSING AND
USING A PARTICULAR BALL BEARING. A bearing consists of a number of hard balls or rollers running in grooves in the
surfaces of two concentric rings or cylinders, one of which is mounted on a rotating or
oscillating shaft or the like. CHOOSING AND USING BEARINGS:
Every bearing has special features that make it particularly suitable for certain uses.
Bearings are chosen on the basis of the following features:
- Available space - Loads the bearing must support (weight and direction of the radial or axial load - Angular misalignment - Speed limit Precision - Noiseless operation - Rigidity - Axial displacement - Mounting and removal TYPES OF BEARINGS:
See following pages for some examples of SKF's range of ball bearings. SKF product
Line: Radial bearings, axial bearings, knuckle bearings, ball bearings for instruments,
Family: Ball bearings, roller bearings, needle roller bearings, knuckle bearings Type:
With one or two lines of balls, one or two lines of rollers, with cage
Model: Different sizes 14 ABC MARKET ANALYSIS
A. Models with a high volume of sales - automobile industry and industrial machinery,
B. Models with a medium volume of sales - public works machinery, railroads, etc.
C. Models with a low volume of sales (most of which are tailored for the specific
requirements of particular customers) - precision instruments, cranes, etc. 15 Figure 5: Types and models of SKF bearings range 16 Figure 6: Types and models of bearings SKF range.
17 18 ...
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This note was uploaded on 11/29/2011 for the course BUSINESS S 103 taught by Professor Casanova during the Spring '11 term at Universitat de Barcelona.
- Spring '11