at the Chinese electronics giant Huawei. Spalcke is a believer in a design procedure called Design for X, or DfX, which
initially grew out of work at the equipment manufacturer
NRC in the 1980s. DfX entails bringing together different
business functions at the beginning of the design process
to identify the product’s key values for customers as well as
what trade-offs are involved in different options.
Traditionally, designers design the product, engineers
figure out how to build it, procurement figures out how
to source parts and materials, and marketing figures out
how to sell it. But with DfX, all of those functions play a
role in the design from the beginning: marketing can tell
design which features are important to customers and
which aren’t, while engineering can suggest changes to
simplify manufacturing. Most important, procurement is
in the process, right from the start, to tell everyone exactly
how much the different options will cost. The procurement
department can challenge the specifications set by engi-
neers if it thinks they are needlessly demanding and will
drive costs too high. It can bring in innovations by suppli-
ers that produce savings. It can also manage the process of
deciding whether different elements of the product should
be made in-house or purchased from outside suppliers, a
key question referred to as “make versus buy.”
Setting up the procurement department to execute DfX
meant changing processes and lines of command. Philips
has three main business sectors: Lighting, Healthcare (med-
ical equipment, such as scanners), and Consumer Lifestyle
(everything from kitchen appliances to electric shavers).
Previously, procurement staff were scattered across those
divisions, reporting to myriad supervisors with entirely
different functions—manufacturing, supply chain, opera-
tions, country leaders—at each level within their own units.
The company’s structure resembled a series of vertical silos:
procurement staff in Lighting, Healthcare, and Consumer
Lifestyles collaborated only haphazardly and on a case-by-
case basis. Within each silo, line managers had created a
welter of different performance indicators based on their
own understandings of procurement’s tasks.
The new system created standardized roles and respon-
sibilities that made it easier for procurement professionals
to connect with the right people. It also changed reporting
lines and shrank the hierarchy, cutting the number of
management layers from seven to four. Instead of having
to report to an array of local supervisors, most of them out-
side the procurement function, procurement staff would
now report straight to the next layer up in procurement.
The only person in procurement with a second reporting
line would be the procurement engineer at the “category”
level—a bundle of products (irons, baby bottles, defibril-
lators, and so forth) four levels down from the CEO. That
would let procurement approach its task as an integrated
mission across the company, rather than treating it as an
afterthought in individual businesses.
Procurement had always reported the savings it generated each year. Spalcke had convinced van Houten that within three years, his new system would beat the old system’s
high-water mark for savings by 1 billion euros. But not
everyone was convinced.
“I was not at all supportive,” says Murali Sivaraman, at
that time CEO of Philips’ Domestic Appliances group, which
includes the juicers Jeeninga and his colleagues worked on.
Sivaraman was based at Philips’ Shanghai research center, where the domestic appliance category’s headquarters
moved in 2012 as part of the company’s drive to decentralize from its European base and move closer to its suppliers
and to growth markets. He saw making procurement officers report back to the CPO as a step backwards.
“My first reaction was, why are you trying to create
another central body? We had already come out of that and
brought things closer to the business.” Besides, Sivaraman
argued, Philips’ lifestyle products are customized to different markets based on consumer feedback; the juicer it sells
in Singapore is not the same as the one it sells in Paris. DfX,
he worried, would strip that away.
THE DESIGN FOR X PROCESS
Earlier in the year, DfX had gotten its first test at Philips, in
the Lighting division’s crucial light-emitting diode (LED)
section. Philips is one of the world’s two largest lighting
companies, but its LED division had been under severe
pressure. It was “a very, very competitive market, with
quarter-over-quarter price reductions, very fast erosion,”
says Colin Kavanagh, the senior vice president, procurement engineering at Philips Lighting brought in by Spalcke.
Overall margins in the lighting division had fallen from
11.5 percent in 2010 to 5. 8 percent in 2011.
Sivaraman had expected to hear that the LED division’s
DfX project was generating incremental savings, with percentages somewhere in the mid single digits. Instead, he
