Executive report of key results of recent research on supplier development strategies and outcomes
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KEY FINDINGSBefore purchasing organizations become involved in supplier development, other supply base management practices such as supplier evaluation and supply base rationalization should already have been deployed. In addition, the company should be able to demonstrate effective internal processes and capabilities. Asking suppliers to adopt practices and techniques that the buying firm itself has not adopted will only result in a loss of credibility with suppliers. The model in Figure 12 depicts the four major stages in developing a globally-aligned supplier network. The four stages incorporate a number of intermediate steps: Step 1: Identify Strategic Supply Chain Needs. The first step involves the identification of a need for improved supplier performance. This need should be explicitly identified and aligned with end-customer requirements and new product development targets. Such needs are driven by customers’ product-specific demands in areas such as cost, quality, delivery, technology and similar objectives, and broader needs in the areas of competitive priorities, global competition, and supply base deficiencies. It is important that cross-functional executive input occurs at this stage of the process, since the objective here is to identify the overall business needs in terms of cost reduction goals, technology roadmaps, global market expansion plan, and so on. FIGURE 12 – SUPPLIER DEVELOPMENT MODEL
Integrative Development 
Identify, Assess & Rationalize the Supply Base Problem SolvingDevelopment Proactive Development  
3. Establish Performance Metrics and Assess Suppliers Increasing Benefits Over Time Critical Success Factors:
  
1. Identify Strategic Supply Chain Needs 2. Search for Competitive Suppliers 
4. Supply Base Rationalization GOAL: Pool of Potentially Capable Suppliers       
10. Supplier Integration in New Product/Process Development 
11. Establish Performance Improvement in Second-Tier Suppliers 
12. Establish Integrated Supplier Network 
GOAL: Globally Aligned Supplier Network  
7. Establish Open Relationship through Feedback and Information-Sharing 
GOAL: Self-Reliant Supply Base – Continuous Improvement 
8. Systematic Supplier Development
Momentum
Step 2: Search for Competitive Suppliers. This stage involves a worldwide search for competitive suppliers based on the criteria established in Step 1. Once a targeted global region is identified, a focused search in the region of interest is carried out. This targeted search is often facilitated and carried out in conjunction with local government agencies and/or partners within the region. Step 3: Establish Performance Metrics and Assess Suppliers. Companies typically established a performance measurement system to assess and track suppliers’ performance over an extended period. Ideally, this performance measurement system should be real-time, and provide immediate feedback to the supplier. Step 4: Supply Base Rationalization. As a function of the search and assessment, suppliers that are clearly not capable of meeting the company’s needs are eliminated and the supply base is optimized. The outcome of this strategy is a pool of suppliers that are potentially capable of meeting the purchasing organization’s need for products and services. Step 5: On-site Risk Assessment by Cross-functional Team. Step 5 represents the first step in a series of true “supplier development” processes. Once a pool of suppliers has been identified, performance metrics are established in the following areas: cost, quality, delivery, cycle time, product and process technology, engineering capabilities and management skills. A detailed risk assessment of suppliers by a cross-functional team of specialists is performed. This team should spend several days with each supplier, and should note suppliers’ deficiencies, weaknesses as well as their strengths. Step 6: Problem-Solving to Eliminate Suppliers’ Deficiencies. This step involves remedial action to correct suppliers’ deficiencies. In effect, this brings suppliers’ performance up to a “minimum” level to be able to serve the firm as a supplier. Once all immediate problems are resolved, the outcome is a supply base that is capable of meeting current requirements. In some cases suppliers are deficient, but the deficiency does not interfere with immediate production requirements. For example, a supplier may lack effective measures, lack engineering capability, or have process inefficiencies. These problems are noted and targeted for improvement on a longer-term horizon. Step 7: Establish Open Relationship through Feedback and Information Sharing. This step precedes proactive development of the supplier’s capabilities and is initiated by establishing an open dialogue with the supplier’s top management. It is here that the “Future Action Required” items (from Step 5) are revisited and brought to management’s attention. Step 8: Systematic Supplier Development through the use of “Direct Involvement Activities; Incentives & Rewards, and Warnings & Penalties. Techniques for supplier-improvement projects may include Kaizen Breakthroughs, process mapping, inventory reductions, training, total preventive maintenance, and other joint projects. These techniques are complemented by the use of award programs and increased business for the best suppliers, which serve as incentives for improved performance. Other techniques include introducing competition for the company’s business and taking business away from poor performers. It should be noted at this step that a different combination of approaches may need to be adopted, depending on the specific set of circumstances with any given supplier. This is particularly true when dealing with global suppliers in different parts of the world. The same supplier may have a very different set of issues at a US plant versus a Germany or Japanese plant, requiring a completely different approach. This was emphasized by one manager we interviewed at BMW: “In the case of BMW in the US, a very different approach was required. In Germany, the plants are established, and they have a group of suppliers who have a given level of understanding with respect to what we want. Here, however, communication with domestic suppliers requires sharing and a “hands on “ support attitude - We have to spend time asking them “What is your corrective action plan, and we will check on you from time to time - We need to suggest possible ways to put solutions in place - Which actions are more beneficial in a startup phase?” At Honda, a similar issue was noted by one manager we interviewed in Japan: Unfortunately, there are very few cases of truly global suppliers. For instance, R&D is very efficient in Japanese suppliers, but these same suppliers may not be effective at R&D in a different location. Thus, it is very seldom that they find a supplier that can supply multiple locations, yet locating these suppliers is one of Honda’s most important development strategies. Finding good suppliers to serve both the US and Japan is not a problem: few suppliers, however, have truly global capabilities. Step 9: Maintain Momentum. Appropriate incentives for improvement should be developed, in order to ensure that the improvement effort is not limited to a single process. The supplier must be encouraged to maintain a momentum for improvement and to make continuous improvement a part of the company philosophy. The outcome of a successful development strategy is a self-reliant supplier that can initiate their own improvement projects based on performance feedback from the focal purchasing organization. Step 10: Supplier Integration in New Product/Process Development. Development continues with the integration of suppliers into the purchasing organization’s supply chain network. This process may begin as the supplier provides input into the development of new products, processes, and services through mechanisms such as co-location, “guest engineers”, and sharing of technology roadmaps. Step 11: Establish Performance Improvement in Second-Tier Suppliers. As an on-going dialogue between the two organizations develops, mapping of the “extended enterprise” should include an assessment and potential development of second tier suppliers, that is, the suppliers to first tier suppliers. Step 12: Establish Integrated Supplier Network. Over time, the focal supplier will become part of the organization’s global supplier network, and may be responsible for supplying multiple global locations and participate in global growth opportunities. As more suppliers achieve this capability, the final objective is to achieve a globally aligned supplier network. It should be noted that even the most advanced organizations interviewed in this study had yet to achieve this level of integration. Thus, this objective remains as a benchmark for organizations to strive for in the future. The latter is a highly challenging goal. Some of the challenges noted by a manager at Honda include:
Some of the critical issues to consider in making this happen include:
We conclude with a final metaphor shared by a Japanese manager regarding the importance of supplier development in Honda’s competitive strategy: Every new product cycle is like a 110 meter hurdle race. The hurdles are the same for all of the racers, yet some are able to master them better than others. They include things such as quality problems, lack of trust, cycle time, FMEA’s, customer requirements, new technology, etc. The finish line represents the product release. In every race, there is always a winner! The winner ultimately captures market share, profits, satisfied customers, etc. Generally, the winner is the one who is able to leap (e.g. manage) all of the hurdles and run (e.g. deploy) the strategy quickest. However, once the race is over, the racers continue to jog around the track getting ready for the next 110 meter race, which represents another chance to win! Although you did not win this time around, by the time you go around the track again, next time you may be a contender! One way of positioning supplier development is to understand what are the “best practices” at each of the hurdles that can turn contenders into winners. As the race continues, priorities will shift according to the nature of the hurdle. Results of supplier developmentThe results of supplier development initiatives, while often difficult to identify and define, vary in scope and degree of success. Results can be largely defined into three separate categories: improvements in suppliers’ performance and capabilities, improvements to the relationship between the buying company and the supplier, and improvements in the buying firm’s competency in managing suppliers. Some of the results reported by companies surveyed in the U.S. are shown in Figure 13. Figure 13: DEGREE OF IMPROVEMENT ATTRIBUTABLE TO THE FIRM’S SUPPLIER DEVELOPMENT EFFORT
APPENDIX THREE BEST PRACTICES IN SUPPLIER DEVELOPMENT The following cases developed from on-site interviews with automotive companies illustrate some of the key differences in approaches used to supplier development by European, US, and Japanese automotive companies. The three cases include BMW, Chrysler, and Honda. BEST CASE 1: BMW’s Approach to Supplier Development Supplier Development Approaches The primary focus at BMW in supplier development is through a program known as “Process Consulting”. This process was developed originally in Germany, but required modification before it could be adopted in North America. Richard mentioned that the revised approach is “more suited to North American conditions, which are substantially different than the relatively well-developed supply base conditions in Germany. Major Differences between German and North American Supplier Development Approaches The “Process Consulting” approach involves analyzing and telling suppliers what is wrong with their process. This works well in mature supplier environments, where the supplier really understands what the customer wants. Because the customer and the supplier have worked together over a number of years, a type of “sixth sense” develops, wherein the supplier intuitively understands the customer’s problems, which precludes the customer from having to explain their detailed expectations. (I have noted this in well-developed relationships, where a supplier can almost “predict” what the customer’s objections will be). The following is a direct set of quotes from Richard Bourne, as best as I can recollect: In the case of BMW in the US, a very different approach was required. In Germany, the plants are established, and they have a group of suppliers who have a given level of understanding with respect to what we want. Here, however, communication with domestic suppliers requires sharing and a “hands on “ support attitude - We have to spend time asking them “What is your corrective action plan, and we will check on you from time to time - We need to suggest possible ways to put solutions in place - Which actions are more beneficial in a startup phase.?” The State of South Carolina provided us with a good initial training program. (Ref: Handfield - can get details from Columbia, SC) - This was a good initial job of training - they did screening and some initial training with respect to what it might be like to work in an automotive industry environment, but to really do it means that you need people who understand processes and who make improvements, and who also understand the consequences of mistakes (i.e. other things go wrong later in the process!) When we came here, the management teams at the new plant underestimated what support was needed, and also underestimated what our quality requirements would be. As a result, we were unprepared to focus our attention on BMW’s quality standards. The supply base really did not understand what would be required of them. This resulted in a number of “strained relationships” with our supply base. Consequently, we ended up spending a lot of time communicating and showing them what was needed. This also led to a major effort to get “buy-in” from these suppliers. The major difference between our approach and that used in Germany was that we could not simply act as a “prop” for their improvement, but the challenge was to get them to see it as a “two-way street”. In many cases, they needed support or needed us to make it happen - we had to make them understand that it was not simply a matter of “you need support” or “you need us to make it happen”, but rather that “your problems are our problems!” “You have good products, bur you have to do better, and we are here to help you!” For example, a typical objective is to be 20% over the industry average, plus beat our competitors. Development is therefore a key impetus to make our suppliers better than the competition. One of the most important ways to achieve this is to communicate expectations. We have recently published a document (ref: Supplier Partnership Manual) which clearly delineates supplier responsibilities, process maps, and all expectations. Such a manual has also been published for our logistics, quality, and engineering functions. Moreover, you must be able to clearly communicate to people what you want, before you can expect it from them. To aid in this objective, we also regularly give seminars in which we present our “Roadmap to Quality”. This is made all the more difficult because we are a relatively low volume product (60,000 units per year). At the time that suppliers were nominated / evaluated, some of their processes were based on a low volume approach, and were not as robust as our requirements demanded. As a result of the combined effect of new people + capital equipment problems + low volume processes, the result was many, many problems! To combat these problems, we worked on process capability (Cpk’s), training and capital equipment problems. Capital Equipment Problems A good example of the type of problem we encountered was a supplier’s conveyor which was constantly breaking down, primarily due to poor design, and a temperature controlled environment that was exceeding the specification level. These two issues results in (1) shutdowns, and (2) product performance problems. In the first case (1), the reaction was panic! Above all else, the supplier sought to keep production going, which in turn affected problem (2). We needed to fix problem (1), before attacking problem (2). Resource Availability BMW does not provide financial support other than owning production tooling at the supplier’s location. We have provided the services of several people over a few weeks, and we have also offered suppliers support any time they request it. For example, we have sent maintenance engineering people, and procurement / logistics / quality people as needed to help suppliers. Our current focus is that we no longer have problem-driven projects, but are pareto-driven in the last 4-5 months to identify problems and prevent them from getting any worse. Supplier Council Our major suppliers have gotten together, but they are not formally represented. The council is mostly an informal affair. Our administration helps/works with them on an ad hoc basis, and we have an annual golf game, but apart from that, there is not a strong council presence. Engineering Focus BMW has traditionally maintained a very strong engineering focus in its organizational culture. This has resulted in a number of different approaches within the organization, especially with regard to the interface between supplier development and engineering personnel. We encountered a number of major obstacles within middle management that we have been able to overcome over the years. Challenges - BMW A major challenge that exists at BMW involves standardizing expectations between here (the US) and Munich, as well as between purchasing and quality. BMW-Spartanburg currently has 70 people in Supplier Quality Assurance. Their intention is not have increase inspection, but they invariably require inspection for new suppliers. An important lesson learned by BMW is for a supplier who is qualified and considered excellent in Europe, their subsidiary in North America may not be capable of meeting the same standards. Globalization involves more than just bringing in equipment and standards from Europe. Moreover, there are often problems in enforcing expectations, and increased training is often required. Communication Problems One of the biggest problems involved the surface of bumpers and body panels, which often had scratches, etc. In setting expectations, it was important to communicate that it was not just a matter of right vs. Wrong, but a matter of setting objective criteria. For instance, setting the standard might involve telling the supplier to hold the part under a light, and examining it at a certain angle to look for marks. For suppliers to understand these expectations, face-to-face discussions and communication and training are required. (Note: This discrepancy was also confirmed in discussions with a BMW supplier. Engineers at Prince confirmed that BMW placed a strong emphasis on physical appearance of body parts, but that such expectations were not clearly communicated in the blueprint design. Moreover, how can one express physical appearances / finish on a blueprint, and how are we supposed to understand their expectations?) The most important and primary task with suppliers is to set standards that everyone understands AND agrees to. This is not so much a problem in electronics, but involves a huge problem in bodywork. Because BMW pays a lot of attention to detail, a big challenge is to reduce cost and reduce over-design, with the objective of competing with the “same product” from the customer’s perspective, even though it is built in the US, not Germany. Supplier Development in Germany (Munich) Many supplier development efforts in Germany were established primarily with the objective of reducing cost as early as 5 years ago. Lately, however, the focus has been more on process optimization, as opposed to cost. (Note - recent Business Week articles suggest that BMW is outsourcing a greater proportion of manufacturing because of the cost of doing business in Germany - e.g. 30 hour work weeks, benefits, etc.) Process optimization refers to the practice of stabilizing processes and reducing parts per million defective, and the methods to achieve these objectives. Process Consulting The primary tool applied in Germany is called “Process Consulting”. Process consulting involves having a group of BMW engineers visit a Germany facility, and explain to the supplier how to improve their process (e.g. in a consulting role). Because of the cohesiveness that exists within the Germany culture, such recommendations are easily adopted by suppliers. Brenda admits that this is an excellent set of tools, but that the manner of applying it in the US had to be modified significantly for the US supply base. Because many of the US suppliers were “not mature”, the process consulting concept had to be modified significantly. In Germany, the majority of suppliers are very mature in terms of their process capabilities, and so Process Consulting involved really just “tweaking” the supplier’s processes. In addition, the cohesiveness that exists between Germans and the length of the relationship between BMW and its suppliers meant that most suppliers understood BMW’s expectations very well. However, the US suppliers supplying the Spartanburg plant have relatively new facilities, and consist in many cases of fewer than 200 employees. The development effort has focused on helping supplier optimize their systems. A key concept involves having supplier understand where they are in their growth and development curve. For instance, many suppliers needed help initially just to get product out the door. In such cases, the emphasis was on solving the big problems that might lead to parts shortages, before attacking the big problems. In the first year of production, suppliers experienced severe ramp-up problems in response to the increases in production demands. In this phase of development, BMW weeded out 50% of the supply base if necessary. Some suppliers had gone through setup just a few months before, but because of their inability to ramp up, were shut out of the supply base. For example, one supplier set up a paint line, but was unable to meet the different set of environmental standards imposed by BMW. They had hired a group of people who hadn’t worked with paint processes before, and simply had no idea of cleanliness and environmental standards. In such cases, although the supplier had good methods, they required significant amounts of “massaging” before they could be used as a supplier. Benchmarking Report BMW has recently carried out a benchmarking report on supplier development, which entailed a set of detailed interviews with Toyota, Honda, Chrysler, Rover, and two other Technical support organizations associated with BMW, in order to compare approaches. The primary question involved was: How do other companies go about Supplier Development? This was done to augment existing German benchmarking studies in this area. The focus was primarily on supplier development processes being used, as opposed to performance and strategic-level benchmarking. Lessons Learned
Note: BMW has an on-going dialogue with Toyota. The attitude is “If what we do helps our competitors, that is okay, but we expect our supplier to expand their knowledge, but not to train our competitor’s suppliers”.
In some circles, the level of “hands-on” support is viewed as “doing suppliers’ job for them” - in reality, this level of support actually involves training the supplier to become self-sufficient. In this respect, supplier development can be very tricky. When our people leave, the supplier cannot “fall apart” again. We need to come back in some cases and help them get back on their feet again.
Comparison of Supplier Development Associates
Other Summary Data from Benchmark Report
Supplier Input on Approaches
Best Case 2: Supplier Development at Chrysler (Note: This was written prior to Chrysler’s merger with Daimler, when Purchasing was under the leadership of Thomas Stallkamp). Chrysler’s Purchasing and Sourcing Strategy Chrysler’s purchasing and sourcing strategy is based on leveraging the resources and capabilities of internal organizations and external suppliers to continuously impact the quality, cost, technology and delivery of Chrysler vehicles for our customers. The organization has evolved into one where continuous improvement has become a way of life, and suppliers are considered as integral members of the Chrysler Extended Enterprise. SCORE (Supplier Cost Reduction Effort) is a continuous improvement process Chrysler utilizes to increase Chrysler/Supplier communications and teamwork. The SCORE approach enables Chrysler to work more closely with its suppliers in the design, development and production of high-quality, cost competitive products - to surpass the requirements of its vehicle customers. As a result Chrysler has become the global benchmark for supplier relationships and cost competitiveness. Procurement and Supply centralizes control of commodity and supplier strategies, policies and procedures while providing focused support to Chrysler’s platform teams. There are five organizations that report to the office of the Executive Vice President of Procurement of Supply:
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