In fiscal year 2021, the main task for Purchasing (formerly Procurement) was once again to safeguard supplies, and to help create competitive, innovative products and optimize cost structures. In addition, we continued to drive digitalized purchasing processes forward. The first half of 2021 was marked by significantly higher demand for Group vehicles, though it became apparent that the capacity that had been drastically reduced in 2020 due to the pandemic could not be built up quickly enough in many areas. As a result, a large number of raw materials and components saw growing shortages of market capacity in 2021; one example being semiconductors, also due in part to the parallel increase in demand in the consumer, IT and telecommunications sectors, which led to supply bottlenecks and price increases.
The new Group strategy NEW AUTO also stands for more speed, focus and stringency within the Purchasing division, accelerating change even more. In 2021, the Purchasing division launched the functional area strategy NORTH STAR, a cross-organizational, comprehensive strategic program. Alongside short-term cost targets, the program seeks to improve our supply situation, increase product quality and boost innovative power and sustainability. Its goals are based on the NEW AUTO Group strategy and are driving Volkswagen’s transformation also from within the Purchasing division. NORTH STAR is also creating optimized structures for our purchasers and setting further focus areas with the digitalization of our processes and increased employee orientation.
A key task for Purchasing is to safeguard supplies for the continually growing requirements of the e-mobility offensive over the next five to ten years in a sustainable way, while optimizing cost structures.
When awarding contracts to our electric mobility partners, we lay down requirements as regards sustainable supplier sources, transparent, traceable supply streams, and energy- and carbon-optimized supply chains. We pool global demand from the European, American and Asian markets and award Group contracts with the aim of achieving cost leadership for electric mobility solutions. To this end, we consider diversification in conjunction with dual-supplier strategies as well as localization of the supplier portfolio for all core components of the electric vehicle fleet in an effort to reduce economic and geopolitical risks.
Digitalization of supply
We are working systematically to implement a completely digitalized supply chain. This is intended to help us to safeguard supply and leverage synergies throughout the Group in order to take a leading position in terms of cost and innovation. We are therefore creating a shared database and using innovative technologies to enable efficient, networked collaboration in real time – both within the Group and with our partners. The Purchasing division aims to standardize transactions with our suppliers in the future and automate them where possible. This will not only reduce transaction costs but will also accelerate business processes. Potential supply risks can be reported in an automated way in order to identify measures and alternatives faster together. The cornerstone for the future of Purchasing was laid in 2018 in the form of Group Purchasing’s digitalization strategy. This strategy aims not only to eliminate the weaknesses of Purchasing’s IT system environment but also to increase the organization’s effectiveness, efficiency and future viability. The initial systems, such as a bot project for automating supply chain business processes, were developed and integrated into the existing system environment.
Structure of key purchasing markets
Our purchasing process is organized at a global level, with a presence in the key markets around the world. This allows us to purchase production materials, investments in property, plant and equipment, and services worldwide at the quality required and on the best possible terms. Networking among the brands’ purchasing organizations enables us to leverage synergies across the Group in the various purchasing markets.
In addition to the brands’ purchasing units, the Volkswagen Group operates seven regional offices. In growth markets, we identify and train local suppliers to generate cost advantages for all Group production sites. In this context, we are also focusing on start-ups and software suppliers. In familiar and established markets, the regional offices support access to the latest technologies and innovations.
Management of purchased parts and suppliers
Today’s supplier portfolio is characterized by global distribution, segmentation and diversification. We address the challenges this presents by supporting and monitoring the industrialization of suppliers with our purchasing supplier management. This starts with auditing and assessing suppliers in preparation for the nomination process and continues with monitoring the maturity of the industrialization of purchased parts, to the complete acceptance and confirmation of the required production capacity at the individual supplier locations. The complexity of the components requires regular monitoring of production processes in order to identify any disruptive factors at an early stage and take action to remedy these. Close cooperation with the quality assurance units at the production sites is crucial for a stable supply of purchased parts for our start-up and series production vehicle projects. The global supplier management network worked reliably, particularly in the face of the persistent challenges posed by the Covid-19 pandemic, and supplies to vehicle and component plants were largely safeguarded throughout the reporting period. However, the supply situation remained precarious in fiscal year 2021, especially for semiconductors, resulting in limited vehicle availability for customers.
Sustainability in supplier relationships
Successful relationships with our business partners are based on respecting human rights, compliance with occupational health and safety standards, active environmental protection and combating corruption. These sustainability standards are defined in the contractually binding Volkswagen Group requirements for sustainability in relations with business partners (Code of Conduct for Business Partners). The Code of Conduct for Business Partners also sets out the expectation that business partners will take steps to ensure compliance in their supply chain. We review compliance with the requirements, which has been an explicit condition for award of contract since 2019, using sustainability ratings for relevant suppliers. The relevance of a business partner for the S-Rating depends, among other things, on the size of the company or the risk exposure arising from the type of service provided.
In our sustainability rating, we determine suppliers’ sustainability performance by means of self-disclosures and risk-based on-site audits. Sustainability ratings had been incorporated into the global procurement processes of relevant companies by the end of the reporting period. By then, we had obtained 12,483 ratings for suppliers, covering 85 % of the total order volume. Both the validation of the questionnaire and the on-site audits are carried out by selected service providers. As a rule, contracts are not awarded to suppliers who fail to meet our requirements concerning compliance with sustainability standards. Tying award decisions to sustainability criteria is one of the strongest levers for enforcing these. We address existing sustainability risks and violations of sustainability principles by systematically defining and implementing measures to correct the violations; this also includes the upstream supply chain. Despite the adversities caused by the Covid-19 pandemic, we once again stepped up our focus on advanced and continuing training for suppliers. In fiscal year 2021, more than 1,700 thousand suppliers took advantage of our training programs such as digital supplier training courses and e-learning.
Our activities in 2021 continued to focus on compliance, decarbonization and human rights.
With regard to decarbonization, the Volkswagen Group is striving to continuously reduce greenhouse gas emissions or avoid them altogether over the entire life cycle of a vehicle. The Group’s transformation into a provider of sustainable mobility solutions and in particular the trend towards electric mobility are shifting the action required from the service life of the vehicle to supply chains and the manufacture of vehicles and components. We are aware of our social responsibility and are committed to the Paris Climate Agreement. We have therefore incorporated the use of renewable energy, among other things, into the specifications for cell manufacturers.
In respecting human rights in our supply chains, we are guided by international agreements and frameworks as required by the UN Guiding Principles on Business and Human Rights and the principles and conventions of the OECD. To comply with these requirements, we introduced a human rights due diligence management system in 2021 to mitigate human rights risks in our supply chain. An additional management system has been set up to effectively manage the sometimes extensive risks in the raw material supply chains. This sets out in detail the prioritization and processing of the raw material supply chains that we classify as particularly high risk. Transparency requirements for our battery suppliers constitute an important basis for responsible raw material purchasing. These contractual requirements include the disclosure of the entire upstream supply chain by our battery suppliers and are effective for new contracts awarded.