1-June-2005 05-06-003 SIG Combibloc - Supply Chain Innovations - It was July 2002 and Theodore Streng, Head of Supply Chain Management (SCM) of SIG Combibloc, the second biggest supplier of aseptic packages for food and beverages just tried to prioritize the aspects he was about to present at the meeting of the executive committee on strategic positioning. The key issue of this meeting was the benchmark report which compared SIG Combibloc to its main competitor Tetra Pak. The results of the study were striking: “Whereas both companies are head to head in all major qualitative aspects, SIG Combibloc lags behind in speed of implementation of new printing designs and customer order lead time”. Senior management was obviously very uncomfortable with these negative benchmarking results and expected him to address this issue and to come up with a solution. Theodore Streng and his team had identified the key problem and would take the lead in the improvement project. This however would involve a radical change in the supply chain management strategy. Theodore Streng realized that it would be on him and his team to convince the executive committee to make the change happen and to decide about the “when”, “where” and “how”. It was clear to them that it would take several months if not years for the effects to materialize. But they were determined that they could turn his vision of an integrated supply chain that linked suppliers and customers to the same platform into reality. Company Information In 1853, SIG Swiss Industrial Group was founded in Neuhausen (Switzerland) by 3 partners as a train car manufacturing plant, employing 150 people. The location was deliberately chosen due to the “Rheinfall” where the waterpower could be used to run the factory. To diversify operations, SIG started the production of small arms in 1860, and became the supplier of the Swiss army as well as the manufacturer of choice for high-precision sporting guns at world championships, and Olympic Games. SIG also transferred the know-how acquired throughout the years to other activities, and set up complementary business lines. Its extensive experience in the treatment of steel for example eventually led to the construction of pneumatic hammers, and hydraulic pumps, which later entailed further diversification. Along the way SIG also became involved in the manufacturing of products like automobiles, planes and vending machines, which were produced in smaller numbers. Dominik Boskamp, Holger Materlik, Franziska May and Dominik Steinkühler prepared this case under the supervision of Professor Lutz Kaufmann and Alex Michel to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. Copyright © 2005 by WHU, Version 2005-06 – 01 No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means – electronic, mechanical, photocopying, recording, or otherwise – without the permission of the supervising author. We continuously want to improve our case development process and ask you to share your experience with us. For feedback please contact Lutz Kaufmann at [email protected] SIG – Supply Chain Innovations In order to offset the economic downswings of the train manufacturing and small arms businesses in 1906, SIG commenced the production of packaging machines, which initially focused on the packaging of chocolate and soup cubes. In 1944 the first packaging machine in the non-food area was introduced for washing powder. Through the acquisition of PKL (“Pack- und Klebstoffwerke Linnich”), Germany, in 1989, SIG entered the field of liquid packaging for milk, juice, soups, and sauces. Several years earlier, in 1975 PKL had made its international breakthrough by introducing “combibloc aseptic”, a leak-proof folding carton packaging system for aseptic food packaging. In 2000 SIG went through a redefinition of the group’s strategy, and decided to focus on packaging technology. The subsequent divestment of its rail vehicle and arms business thus irrevocably ended the “railroad era” with which SIG’s history had once started. At the end of 2002, the SIG Group was composed of three major divisions. The first, SIG Combibloc, was the heir of the former PKL business, and produced aseptic packaging for food and beverage products (as described above), as well as aseptic filling machines, spouts and corresponding application machinery. An overview of Combibloc’s products is shown in Appendix A. The second division, SIG Beverages, provided integrated lines for the beverage industry for cans as well as plastic and glass bottles including filling machines, fitment and labeling equipment, downstream equipment, and stretch-blow molding machines for PET bottles. An overview of the products and services of the Beverage division is shown in Appendix B. The third division, SIG Pack, manufactured packaging systems and machines for fast-moving goods like food, and consumer goods. SIG was constantly expanding its businesses by setting up subsidiary companies in foreign countries in order to achieve greater proximity to the local markets, and to react more quickly to various customer demands. In 2002 SIG Combibloc had just laid the foundation stone for a new packaging plant in China to expand the global reach. An overview of SIG Combicloc’s sites and the sales per region can be found in Appendices C and D. SIG Combibloc was by far the most important division, accounting for over 50% of total Group revenue, and contributing most of the company’s profits (see Appendix E for a group income statement). In 2002, the SIG Combibloc activities were managed by a central Holding in Switzerland which also managed the three central functions IT, R&D / Filler Production and allCap systems (see Appendix F). Financing, Controlling, HR and legal were also administered by the Holding. SCM had been established as a central function in 2002. The business activities were grouped in five regional business units (Western Europe, Eastern Europe, UK, Asia, America) which independently managed the packaging and service activities. SIG Combibloc had approx. 3,700 employees and worldwide production in 2002 amounted to more than 10 billion carton sleeves. Especially its mid-term progress was remarkable. Average compared annual sales growth since 1990 had been 9% p.a. and within just three years the division had been able to double its operating profit. The business model of SIG Combibloc envisaged the provisioning (sales / leasing) of filling lines to the customers, and later the exclusive supply of carton sleeves for their production. Most of the time, the prices charged for the machines hardly covered their production and assembly costs. On the other hand to a certain extent they presented the means to achieve the desired level of customer retention for the sale of carton packages in the years after the installation of the filling line. Therefore, the business of SIG Combibloc was much less cyclical than the classic engineering sector because it did not depend - 2 - SIG – Supply Chain Innovations on one-time projects of expensive machinery or systems. Instead the profits were made by the subsequent sale of aseptic packaging materials, which were continuously needed by customers in order to run their operations. Market Overview The instable macroeconomic and political environment in 2002 due to the aftermath of the terrorist attacks on September 11, and the threat of a potential conflict of the USA with Iraq, caused many customers of SIG to exercise considerable caution, and postpone investments in new systems. On the other hand, market growth especially in Eastern Europe and China increased consumer demand for aseptically packaged goods. Beverage cartons accounted for about 50% of those packaging solutions, and this share was likely to increase even further in the future due to its cost advantage versus other containers and its logistical robustness of the beverage carton. An example of this advantage was the decision of Germany’s Federal Ministry of Environment in 2002 to amend packaging legislations allowing beverage cartons to remain deposit-free. The overall market size for packaging solutions in the segments in which SIG was active (including SIG Beverages and SIG Pack) was estimated to be around 11-12 bn EUR. The Swedish Tetra Laval Group, which was privately held, dominated the market. Other important players in the beverage packaging industry besides SIG were Krones, Sidel, KHS and Elopak. However, Krones, Sidel, and KHS focused on engineering of filling liner for bottles (glass, plastics) and cans, and were not active in the carton business or in the sale of other packaging materials. In the segment of aseptic carton packaging, Tetra Laval with its Tetra Pak held about 85% of the world market and SIG Combibloc covered the remaining share. While Tetra Pak was clearly dominating in the segment of dairy products, SIG Combibloc had a stronger relative position in the aseptic packaging of fruit juice, ice tea, soups, and sauces. Moreover, apart from the absolute size, there was also a fundamental difference between Tetra Pak and SIG Combibloc with respect to the filling technology deployed. While Tetra Pak filling machines were fed by a role of uncut packaging material, where the cutting and creasing was done during the filling process, SIG Combibloc delivered pre-cut and creased packages, which were then filled at the customer plant. The entry barriers into the market for aseptic carton packaging could be considered very high due to the stringent quality requirements of customers, and the complex technology of aseptic filling, which necessitated company know-how in the packaging segment as well as in the engineering segment. Furthermore, the players in the market already endued a strong installed base of customers equipped with a filling machine, which created network effects, and large economies of scale, thus making it hard for new entrants to gain a foothold in the market.