PART A:

Strategic Supply
Base Management
Small Part, Big Impact: The Miele Way of Sourcing 17

Small Part, Big Impact:

The Miele Way of Sourcing

Sultan Hochweiß, Moritz John, Florian Richter, and Romy Seidel prepared this
case under the supervision of Lutz Kaufmann and Matthias Ehrgott to provide
material for class discussion. The authors do not intend to illustrate either the
effective or ineffective handling of a managerial situation. The authors may have
changed certain names and other identifying information to protect confidentiality.
18 Small Part, Big Impact: The Miele Way of Sourcing

“Günther, this new design is excellent! We would like to launch this in all
countries!” On May 31, 2004, Günther Reinelt, Vice President of Corporate
Procurement at Miele in Gütersloh, Germany, had lunch with Max
Mustermann, Vice President of Marketing and Sales. The subject of their
discussion was the design of control panels for the special edition W1000
washing machines and T7000 tumble dryers that had recently been
launched in Germany. Mustermann was excited about the new three-
dimensional layouts to replace the formerly plain two-dimensional plastic
parts: “This adds a cutting edge to our machines. We never had a better
looking product to work with. I will write a proposal for this afternoon’s board
meeting – suggesting launching this special edition product line in all
countries!”
Reinelt was not as enthused as his colleague. He had just implemented a
new sourcing process for the control panels of the W1000 and T7000 series.
These special edition appliances had so far only been sold in a few markets.
As a result, there were 5 technically different versions, each in two printing
varieties per product type that were directly delivered to Miele’s plants.
Mustermann now had in mind to have the same number of technical parts,
but in 128 different printing varieties. This would result in a complexity
increase from 10 to 128 versions. Frankly, the current process was bound to
fail under such a heavy load.
Leaving the cafeteria, Reinelt knew what he had to do before the meeting:
He would have to analyze the current procurement process and come up
with viable solutions on how to establish a cost- and time-efficient material
flow.

The washing-machine and tumble-drying business

The core performance indicators of a washing machine were durability, level of

noise, water and energy consumption, and results in terms of cleaning
effectiveness and fabric maintenance.
Producing and selling washing machines was very similar to the dryer business.
Specifically, a factory could easily switch production from washing machines to
dryers and vice versa. Further, there was hardly any product cannibalization or
competition on the output side, since customers did not substitute washing
machines with dryers.
In Germany, Miele’s major competitors were Bosch Siemens Home Appliances
(BSH) and AEG. Korea’s LG represented strong competition from overseas.
However, in the premium price segment, Miele had no direct competitors that
offered comparable quality in a similar price range. Even Miele’s low-budget
Small Part, Big Impact: The Miele Way of Sourcing 19

devices carried a price tag well above the industry average (see Exhibit 1: Miele’s
market position).

Miele: A German benchmark

Company background

Miele was founded in 1899 by Carl Miele and Reinhard Zinkann and has been a
prospering family business ever since. Headquartered in Gütersloh, a city in
Western Germany, Miele had a strong international reputation and distributed its
products to customers around the world (see Exhibit 2: Milestones at Miele).
With a headcount of 15,000, the company manufactured premium home appliance
products and sold them around the world through their 38 distribution companies.
Currently, 128 different country markets were supplied directly through wholly
owned sales organizations, and more than another 80 markets were accessed
through sales agents. Sales totaled €2.15 billion in 2004.
Over time, Miele had always put a strong focus on adjusting its product portfolio to
the taste of its customers. For more than a century, the small business, which
initially produced cream separators, had become a leading company in the home
appliance industry. Today, Miele’s brand name was associated with durability,
innovative strength, tradition, responsibility, and - most of all - the highest
standards of quality. True to the company’s motto, “Forever better”, Miele’s
appliances aimed to have a life expectancy beyond 20 years. All of the products
were energy and water efficient and were made from materials that were easily
recyclable.
Miele engineered and produced the first fully automatic washing machines. In
addition, the company was also one of the first companies in Germany to provide
health insurance for its employees. Ethical standards were an integral part of
Miele’s corporate identity, and these carried over to its supplier policies. This
included a commitment to minimum wage agreements and a strong stance against
child labor. Adherence to these values was a key condition prior to supplier
negotiations. Miele’s own production sites were the same since its founding: There
had never been site closures or relocations. This was a significant achievement for
a German company, given the comparably high cost of labor in its home country.
20 Small Part, Big Impact: The Miele Way of Sourcing

Since 1974, the Miele Foundation had been financing charitable projects. The
company itself supported youth, cultural and sporting interests. High priority was
also assigned to environmental issues.1

Miele’s products

After Miele began making cream separators in 1899, the company frequently
adjusted its product portfolio. Over the course of its long history, Miele produced
cars, trash machines, bicycles, and numerous other items outside the home-
appliance category.
Today’s product portfolio consists of washing machines, dishwashers, dryers, and
kitchen designs2 (see Exhibit 3: Miele’s product portfolio). The latest generation of
washing machines featured not only the patented honeycomb drum, but also the
Navitronic or TouchControl control systems.3 While the company did not intend to
become the price leader, its devices offered a unique design and high functional
quality “engineered in Germany”.

High-quality approach

Miele relied heavily on its excellent reputation. Customers worldwide appreciated

Miele’s clear dedication to the premium segment. Before being introduced to the
market, all new Miele models were run through an extensive testing procedure in
which all parts were exposed to forces equivalent to 20 years of operation.
Additionally, each individual machine was tested before being packaged for
delivery to the customer.
Over the years, Miele won numerous awards that reflected this successful
approach. Miele appeared to be on the top of consumers' minds when asked which
brand they trusted the most: Miele won the Reader’s Digest “Most trusted brand”
award for home appliances in Europe in 2002 and 2003.

______
1 Company-wide compliance with the norm ISO 9001 (quality), ISO 14001 (environment), and the
norm SA 8000 for social standards; compliance was ensured by a yearly assessment of the
management system by external inspectors
2 In 2004, the “Miele Küche” section also designed and delivered complete kitchens
3 Further information about the most recent products can be retrieved from http://www.miele.co.uk
and http://www.miele.com
Small Part, Big Impact: The Miele Way of Sourcing 21

Innovation: R&D
Investments in research and development amounted to about 7% of annual
revenue, or €150 million every year. Over the last five years, Miele had registered a
record of 350 patents with the German Patent Office and filed 112 European and
62 U.S. patents. Eight of Miele’s nine production plants in Germany included an
R&D center that specialized in the respective appliances produced.

Miele’s organizational structure

Like many diversified companies, Miele was organized in a matrix structure (see
Exhibit 4: Miele’s organizational structure). In every plant, there were departments
for purchasing, construction, development, quality management, production, and
human resources. Local departments reported directly to senior management,
advocating for local issues.
However, there was a cross-relationship between all departments at the individual
assembly plants within a central commission for each of the functions. While line
managers had local responsibilities, functional committees were located at Miele’s
headquarters in Gütersloh. These committees were responsible for steering the
group-wide activities in each specific function. This structure offered Miele a good
balance between local requirements and the group’s interests. Strategic oversight
enabled the company to determine necessary trade-offs among the separate
plants, countries, and products/product groups.

Purchasing department

Miele’s purchasing department was also part of the matrix structure (see Exhibit 5:
Miele’s procurement organization).
Prior to purchasing from a new supplier, Miele went through a careful evaluation
process. The product, the supplier, and its operations were carefully analyzed. The
company had to precisely determine which requirements the product or the
particular parts had to comply with. The supplier had to prove it was able to
consistently deliver the desired quality and quantity, and to also show robustness
against external factors. This evaluation process included designing scenarios and
rating the supplier’s potential. Miele expected it would need at least three months
to source a commodity. Sourcing of a very specific or highly important part could
take up to 24 months, sometimes even longer. Overall, Miele collaborated with
2,400 suppliers for its production materials. However, the company had begun to
continuously reduce this number in order to lower complexity costs.
22 Small Part, Big Impact: The Miele Way of Sourcing

The high number of suppliers was the result of Miele’s policy not to account for
more than 25% of a supplier’s annual revenue. This precluded Miele from potential
hold-up risk in case a partner faced financial difficulties; it had become industry
practice that customers with the highest stakes had become obliged to save a
financially struggling supplier.
In Miele’s central purchasing department, four eastern Asian and five eastern
European languages were spoken. Miele had been active in China for more than
11 years and had gained vast experience in the country. This knowledge was
crucial in order to be able to conduct the required analysis for purchasing
decisions. The central procurement team had an excellent understanding of the
company’s products and understood the needs of the local production and R&D
teams. Outsourcing was especially beneficial for certain products. As a rule of
thumb, it was particularly advantageous for products that were very labor intensive
and easily transported.
When it came to outsourcing, Miele had learned from setbacks. For example,
despite exhaustive negotiations and a great deal of effort, a Turkish local supplier
was not able to provide a level of quality sufficient to pass Miele’s inbound quality
control process. After many attempts and vast investments, the negotiations
eventually ended without a contract. Although the sunk costs were enormous for
both parties, quality requirements were non-negotiable for Miele.

Production at Miele

Locations

Miele’s production took place in 11 factories; eight located in Germany and three
abroad. The German plants were all located in cities fairly close to one another.
The three foreign production sites were based in Austria, the Czech Republic, and
China (see Exhibit 6: Miele international). The Austrian plant was a center of
competence for stainless steel parts and, as such, also an in-house supplier to
other Miele factories. The site in the Czech Republic produced tumble dryers and
dishwashers, while the Chinese plant made products utilized by the Chinese joint
venture. In particular, these were standard vacuum cleaners that could no longer
be profitably sold in other countries. The production process in Gütersloh was
considered the template for all of Miele’s plants. Miele manufactured an
exceptionally high share of its parts in-house. Process steps from sheet-metal
forming and injection molding, to highly specialized processes like enamelling
could all be performed in Miele’s own facilities. The parts manufactured in-house
as well as those that were sourced from the outside arrived “just-in-sequence” at
the final assembly lines, where they were assembled by skilled workers on a job-
rotation schedule. The final assembly line for washing machines/dryers had two
Small Part, Big Impact: The Miele Way of Sourcing 23

starting points: one for the engine and one for the frame. Both parts were
assembled halfway down the line in a step called "the marriage" (see Exhibit 7:
Production line at Miele).
It was critical that the parts arrived at the final assembly line in the perfect
sequence. Workflow efficiency suffered significantly if a part was missing or not in
the right place at the right time. Therefore, special attention was paid to production
planning and requirements forecasting.

The control-panel issue

The W1000 and T7000 series of washing machines and tumble dryers had recently
been redesigned. Now, they featured an innovative three-dimensional design for
the front and the control panel.
At first, these series were introduced to five European markets only, starting with
Germany. A key point that set Miele apart from its competitors – aside from its
superior technology and elegant design – had always been that labels on the
machine controls were written in the local language. Thus, the customer did not
have to flip through the manual trying to decipher what symbol on the panel stood
for which program. Therefore, individual labels for each country were a crucial
factor for Miele’s differentiation strategy. Furthermore, each series came in different
models, for which five technically different control panels were required. This was
due to a different positioning and number of buttons on the plastic surface (see
Exhibit 8: The new three-dimensional control-panel design).

The expansion

Due to its innovative design, the series had astonishing success. As a result, the
sales and marketing team was in favor of launching these enhanced-series
machines in all country markets. This would increase the variations of machines
because the new markets had a high number of different languages and different
technical regulations for items such as certificates and plugs. The expansion
proposal resulted in a number of challenges. Günther Reinelt was especially
concerned about managing the supply of the control panels.
Control panels were produced in two stages. First, the plastic base for the control
panel was molded, and in a second step, the program names and other version-
related details were added. For the two-dimensional panel the printing process was
fairly simple. Nonetheless, the time and set-up costs needed to switch printing
patterns were worth it only for large batches of at least 1,000 machines per version.
Therefore, the initial supplier for the two-dimensional panels, located close to
24 Small Part, Big Impact: The Miele Way of Sourcing

Gütersloh, had to retain high levels of inventory. Some models, like a product in
short demand from a minor market, were only produced in small numbers and as
infrequently as 10 times a year. That meant that one order of control panels would
have been sufficient for more than a decade of production. But since product types
and techniques changed frequently, Miele had to repeatedly scrap large numbers
of control panels.
For technical and commercial reasons, Miele had decided earlier to source the
three-dimensional control panel not from established suppliers, but from a new
plastic-part manufacturer located 370 miles south of Gütersloh. The three-
dimensional printing required a special technique that was far more complicated
and time consuming than the one for the two-dimensional panels. Initially, no
plastic supplier in Germany had been equipped with technology advanced enough
to satisfy Miele. Because the original two-dimensional supplier had not been willing
to learn and invest in a new molding and printing facility, Miele carried out an
intensive supplier search and finally placed the order with a new supplier. Test runs
showed that this supplier was able to meet Miele’s requirements for the special
editions W1000 and T7000, but did not have much potential left to take on
additional complexity. The new printing technique, however, did not lower changing
costs or batch sizes, so inventory levels at Gütersloh for the special edition could
not be reduced.
Reinelt knew that the Board of Directors would be eager to support the new project.
He knew that he needed to come up with a powerful procurement concept for the
new parts. Although he had successfully handled changes before (see Exhibit 9:
Successful change management: user manuals), he knew this time it would not be
an easy case to solve.
Small Part, Big Impact: The Miele Way of Sourcing 25
4
Appendix

Exhibit 1: Miele’s market position

A. Market share in the washing machine market (by sales, 2003)

B. Market share in the German washing machine market (by sales, 2003)

Miele
BSH
Others

______
4 Source of all information: Miele 2004
26 Small Part, Big Impact: The Miele Way of Sourcing

C. Market share in the German washing machine market (by units, 2003)

Miele
BSH
Others

D. Market share in the German washing machine market (by sales, 2003)
Small Part, Big Impact: The Miele Way of Sourcing 27

Exhibit 2: Milestones at Miele

1899 Founding of Miele & Cie.; production of cream separators

1900 Production of butter churns and washing machines
1912-1914 Production of motorcars (125 vehicles)
1914 First washing machine with an electric motor; branches set up in
Brussels, Buenos Aires, Paris, Warsaw, and Vienna
1924-1960 Production of bicycles and motorcycles in Bielefeld
1927 Production of first vacuum cleaners
1929 Production of Europe’s first electric dishwasher
1956 First fully-automated washing machine
1958 First domestic tumble dryer
1978 First microprocessor-controlled washing machines, dryers, and
dishwashers
1997 First washing machine with a program for hand-washable woollens;
first mobile receiver to process data transmitted by Miele domestic
appliances
2001 Launch of the patented honeycomb drum
2003 Navitronic washing machines and tumble dryers with “automatic”
program
2004 New G 1000/G 2000 dishwasher series using patented production
process; new washing machine/tumble dryer series with innovative
design
28
Exhibit 3: Miele’s product portfolio
Current portfolio of residential products
 Vacuum cleaners
o Canisters
o Uprights
 Cooking appliances/ovens
o Warming drawers
o Steam ovens
o Speed ovens
o Ranges
o Ventilation systems
o Combination sets
o Decorative lift doors
The relevant special edition
Washing Machine W1000 Series
Small Part, Big Impact: The Miele Way of Sourcing
 Laundry systems
o Washing machines
o Clothes dryers
o Rotary irons
 Coffee systems
o CVA
o Plate & cup warmers
o System drawers
 Dishwashers
 Kitchens
Tumble Dryer T7000 Series
Small Part, Big Impact: The Miele Way of Sourcing 29

Exhibit 4: Miele’s organizational structure

Management

R. Bazzi R. Zinkmann E. Sailer M. Miele H. Schübel

MGM NFM = Material group management of non-production materials
MGMMarketing/Sales
FM = Material groupTechnic/Facilities
management of production materials
Finance/Controlling

Sales Central Central Factories Central Hong Da

Company Area Area Area GTH/ (Joint
(SC) GTH/WFM GTH/TC Purchas. Venture
PRC)

SC US GTH/MTI GTH/DSN GT P GTH/DL

Purchas. Purchas.
SC Belg. GTH/S GT E

GTH/S GTH/PRC Bielefeld

GTH/KA GTH/INSU GTH/INSU

GTH/EO Eusk.
GTH/PI GTH/HR GTH/HR

Lehrte
GTH/ADVI GTH/ORG GTH/ORG
38 SCs
Warendorf
GTH/CSI GTH/FC GTH/FC

Arnsberg
GTH/KA GTH/BST GTH/BST

Buende
GTH/PR GTH/CD GTH/CD

Buermoos
SC UAE GTZ/SI

Unicov
MGM NFM MGM FM

Organizational unit with purchasing function

MGM NFM = Material group management of non-production materials

MGM FM = Material group management of production materials

GTH = Gütersloh Headquarter, S = Standardization, WFM = Washing & Floor Maintenance (marketing
function), MTI = Marketing Trading Goods International, KA = Kitchen Appliances, PI = Professional
International, ADVI = Advertisement International, CSI = Customer Service International, PR = Public
Relations, SI = Sales International, TC = Technical Coordination, DSN = Design, PRC = Property Rights
& Contracts, EO = Environment Office, P = Production Plant, E = Electronics, DL = Distribution
Logistics, INSU = Company Health Insurance Fund, HR = Human Resources, FC = Finance &
Controlling, BST = Balance Sheet & Taxes, CD = Construction & Development
30 Small Part, Big Impact: The Miele Way of Sourcing

Exhibit 5 : Miele’s procurement organization

Board of Directors

Procurement Committee

Factory 1 Factory 2 Factory n

Procurement Procurement Procurement

Central Procurement Department

Production Production Production

Quality Quality Quality

Management Management Management

Research/ Research/ Research/

Development Development Development

etc. etc. etc.

Small Part, Big Impact: The Miele Way of Sourcing 31

Exhibit 6 : Miele international5

In Germany:
Gütersloh factory
Gütersloh was home to Miele’s original factory and administrative headquarters,
the central distribution warehouse, and the electronics factory. Approximately 5,000
employees developed and manufactured washing machines, tumble dryers,
washer-dryers, electronic controls for all Miele machines, and a multitude of parts
for other Miele factories.

Bielefeld factory
Laboratory washer-disinfectors along with domestic dishwashers and vacuum
cleaners were developed and manufactured in Bielefeld.

Oelde factory
Ovens, compact ovens with microwave technology and hob control units were
developed and manufactured in Oelde.

Warendorf factory
After the sale of the kitchen factory in Warendorf, the focus of production shifted to
thermoplastic injection-molded parts for automatic washing machines, dryers,
dishwashers, vacuum cleaners, and pump or motor housings. The site was also
involved in spare-parts logistics.

Lehrte factory
Specialized in the development and manufacturing of washer-extractors, tumble
dryers, and flatwork ironers for commercial use.

Euskirchen factory
Electric motors for domestic and commercial Miele machines as well as vacuum-
cleaner motors were developed and produced in Euskirchen.

Bünde factory
Hobs, steam ovens, plate warmers, ovens, and the electronic controls for the
products made on-site were developed and manufactured at the Bünde factory.

Arnsberg factory
Focused on the development and manufacturing of cooker hoods and related
accessories.

______
5 Number of employees refers to the status quo on June 30, 2004
32 Small Part, Big Impact: The Miele Way of Sourcing

Outside Germany:
Bürmoos factory (Austria)
Specialized in processing stainless steel for the medical-technology, chemical-
systems, and food-industry sectors.

Uničov factory (Czech Republic)

Since 2004, washing machines, tumble dryers, and washer-dryers were produced
in the Uničov factory.

Dongguan factory (China)

Products utilized by the Chinese joint venture, in particular standard vacuum
cleaners.

Exhibit 7: Washing machine - Production line at Miele

User manuals are

delivered JIS to
production line
Assembly of
motor and
tumble
Customization to order
“Marriage”
and country specs
Assembly of
frame

Control panels & small

items arrive assorted
from JIS stock

Quality
Shipment Packaging
control
Small Part, Big Impact: The Miele Way of Sourcing 33

Exhibit 8: The new three-dimensional designs of control panels

From 2D to 3D design:

2D
to
3D
34 Small Part, Big Impact: The Miele Way of Sourcing

Examples of printing versions:

Examples of
technical
printing

Examples of
program printing
Small Part, Big Impact: The Miele Way of Sourcing 35

Exhibit 9: Earlier change management

Insight into the experience of the procurement department: user manuals

Every washing machine is delivered with a user manual. Despite the fact that this
was a legal requirement, the customer could not take full advantage of the special
features of a Miele washing machine without a manual at hand. Delivering the
manual in the language of the country in which the machine was sold was common
sense. But Miele, as part of their total customer focus strategy, took the standard
one step further and delivered the manuals only in the respective language. Since
this precluded bundling common languages into one standard manual, it caused a
large number of different manual versions to be printed. Until 2001, the manuals
were printed and delivered in quantities of several thousand because of the high
set-up costs to run each version. Unfortunately, the specifications in the manuals
had to be changed often, not only because Miele upgraded and modified its
machines, but also to reflect a number of changes to various national laws. Thus, a
significant stockpile of manuals regularly became outdated.
At this point, the purchasing department intervened by giving the printing contract
to a company that was able to deliver just-in-sequence manuals in single-lot sizes
by implementing a new printing technology (high-speed digital copying).
On the company level, there was another issue to handle: Since no product could
be shipped without a manual, the cost of supply breakdowns would be high. The
purchasing department hedged for that risk by hiring a second offset printing
company. These companies were contracted to have redundant capacities. In case
of a fire at one printing facility, for instance, alternative suppliers could temporarily
take over delivery; thus, Miele would not have to suffer from an entire process
breakdown.