Partnering to Improve the Supply Chain

Competitive Bidding vs. Partnerships

• Bidding
• Usually yields low cost
• Short term benefits
• Could be first step in establishing a partnership
• Partnerships
• Supplier offers expertise along the way
• Supplier is a stakeholder in the success

Partnering to Improve the Supply Chain

“Profitable suppliers are healthy, stable suppliers that lower costs and reduce your supply risk. Reduced costs are great, but it benefits you to ensure that your suppliers are making enough profit to deliver promised goods and services.” - Industry Star Solutions, 2016

The Relationship

Transactional / Collaborative / Alliance

• Transactional relationships have their place
• For example, GM buying paperclips

Product Development / Management

• Collaborative and Alliance Benefits
• Drives Innovation
• Yields Cost Reductions
• Better Quality Products
• Mitigates Supply Risk
• Improves Overall Time to Market

Conclusion

Early Supplier Involvement (ESI)

PM508 - Contract Management

Raymon L. Williams

Similar benefits to collaborative and alliance relationships

• Improved profits
• Improved time to market
• Improved quality

Additional Short Term Benefits:

• Lower production costs
• Shorter development cycle
• Lower development costs

Ultimately, a company must be strategic in deciding how to manage its suppliers, and when it is appropriate to transition toward more of a partnership sort of relationship with them.

These strategies may result in one company having multiple degrees of relationships and partnerships with various suppliers.

Additional Long Term Benefits:

• Joint research programs
• Aligned technology strategies
• Risk sharing

"Driving" Partnerships

ESI Challenges

• Choosing the right supplier with the right capabilities
• Supplier remaining cooperative

• Both supplier and buyer should improve over time
• Respecting each other's intellectual property

6 Tips for ESI

• Make cost data sharing mandatory as a condition of involvement in the development

• Minimize the overhead percentage by scrutinizing how it is calculated, and treating it as direct cost

• Understand all assumptions in the supplier’s cost structure, and document them

• Agree to the right terms, preferring a cost plus fixed fee structure, and having suppliers share their accounting records

• Audit the suppliers books to compare actual versus estimated costs, as well as the assumptions previously documented

• Continuously evaluate cost reduction opportunities with the supplier

Studies of Automotive Industry Giants and They're Suppliers

The Automotive Example

The Big 3

“The Big Three [U.S. automakers] set annual cost-reduction targets [for the parts they purchase]. To realize those targets, they’ll do anything. [They’ve unleashed] a reign of terror, and it gets worse every year. You can’t trust anyone [in those companies].” — Director, interior systems supplier to Ford, GM, and Chrysler, October 1999

"close-knit networks of vendors that continuously learn, improve, and prosper along with their parent companies.” (Liker & Choi, 2004)

Keiretsu

Honda

The company should recognize that for business critical supplies, a closer relationship will likely result in long-term profit improvements, product performance, and cycle time to market.

“Honda is a demanding customer, but it is loyal to us. [American] automakers have us work on drawings, ask other suppliers to bid on them, and give the job to the lowest bidder. Honda never does that.” — CEO, industrial fasteners supplier to Ford, GM, Chrysler, and Honda, April 2002

Thank you!

Be this...not that...

Toyota

“Toyota helped us dramatically improve our production system. We started by making one component, and as we improved, [Toyota] rewarded us with orders for more components. Toyota is our best customer.” — Senior executive, supplier to Ford, GM, Chrysler, and Toyota, July 2001

Pop Quiz

What are the 3 types of relationships according to Burt, Petcavage, and Pinkerton?

6 Steps to Honda / Toyota Success

Share Information Intensively But Selectively

• Set specific time/place/agenda for meetings
• Use rigid formats for sharing information
• Insist on accurate data collection
• Share information in a structure fashion

Supervise Suppliers

Ultimately

Step 6

• Send monthly report cards to core suppliers
• Provide immediate and constant feedback
• Get senior managers involved in solving problems

Honda and Toyota worked to maximize their profits, NOT at the expense of their suppliers

Understand How Their Suppliers Work

Step 4

• Learn about their business
• Go see how they work
• Respect their capabilities
• Commit to co-prosperity

Step 5

Conduct Joint Improvement Activities

Step 2

• Exchange best practices
• Initiate kaizen projects at suppliers' facilities
• Set up supplier study groups

Step 3

Develop Suppliers' Technical Capability

• Build suppliers' problem-solving skills
• Develop a common lexicon (verbiage)
• Hone core suppliers' innovation capabilities

Turn Supplier Rivalry Into Opportunity

Step 1

Counterfeit Keiretsu

• Source each component from 2 or 3 vendors
• Create compatible production philosophies
• Setup JV's with suppliers to transfer knowledge and maintain control

US automakers began implementing a keiretsu model, however it turned into a superficial, cost-cutting culture, departing from the original essence.

Turned their focus to China and low-cost country sources

Focused on short term benefits of low cost, versus long term relationships

Ford

“In my opinion, [Ford] seems to send its people to ‘hate school’ so that they learn how to hate suppliers. The company is extremely confrontational. After dealing with Ford, I decided not to buy its cars.” — Senior executive, supplier to Ford, October 2002

Pop Quiz

What does ESI stand for?