Concepts Of Supplier Development Management Essay

It is defined as an activity which is carried out for improving the supplier’s ability and performance, by the customer firm, so as to meet the supply needs of the customer (Krause and Wagner, 2008).

It is also defined as the mutual effort by customer and supplier base, to improve the supplier’s capabilities or performance in the areas of cost, delivery, technology, quality, time, management, environmental accountability and financial feasibility (Krause and Handfield, n.d.).

“Supplier development is the process of working with certain suppliers on a one-to-one basis to improve their performance for the benefit of the buying organization” (CIPS, n.d.).

Thus, it is a necessary approach which is accepted by various companies so as to improve their supply chain. It helps in improving the capacity of the company, meeting the needs in quality, cost and delivery and to recognize the way of reducing waste.

Supplier Development

Supplier Involvement

NPD Performance

Company

Performance

+

+

+

From the figure we can say that if we involve suppliers in the initial stages of development then it would increase the NPD performance and hence would increase the company’s performance (Krause and Wagner, 2008)..

1.1) Concepts of Supplier development

It is fairly a new concept, which is concerned primarily with the product development. As traditionally a product takes lot of time to develop but with this concept, the same thing can be done in quicker time thereby reducing the cost of production, improving performance and resolving the quality issues.

According to (CIPS, n.d.)

An organisation should establish its several needs and objectives before implementing the supplier development.

Supplier’s assessment should be done on the basis of its value and potential, not on the basis of supplier’s rankings.

The Supplier development approach should be made based on the situation and is different for every situation the company faces.

The suppliers should be encouraged in developing the relationship with their customers.

It’s the buyer and the suppliers who really have to decide about the time of ending the development project.

A supplier Development may involve in redesigning the corporate strategy for developing the supplier’s business so that it develops a long term relationship with its buyer and there should be a smooth decision making process in order to achieve their objectives.

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There are several prerequisites for it, like skills in the areas of technical purchasing, project management and contract management. Also there is a need of excellent interpersonal skills, so as to develop an effective communication between the supplier and the customer base and also an ability to appreciate each other for the job done.

The Supplier Selection is done on the basis of improvement opportunity, supplier co-operation, cost, complexity and duration.

Also as per supplier development, the suppliers are categorized in 3 ways

Being developed

Possibility for development

Not being worth of development

To encourage the suppliers for their work, some rewards in the form of incentives should be given.

1.2) Research Findings

According to (Krause and Wagner, 2008) different companies have different approaches towards New Product Development (NPD). Supplier evaluation plays an important role in NPD as it helps in evaluating risks in terms of performance, timeline and trust.

For measuring the Supplier evaluation, a grid is formed, representing complexity of suppliers in vertical axis and horizontal axis represents the complexity in the system.

Based on the assessments, it is decided how to assign resources for supplier evaluations.

1.2.1) Supplier Development model (Krause and Handfield, n.d.)

This model helps the companies to figure out the way of doing Supplier Development. It gives emphasis on “How to do the supplier development.”

There are 4 major stages in the development of a universally aligned supplier network.

Stage 1: To identify, rationalize and assess the supplier base

Step 1: It involves the recognition of a need, which is aligned with the requirements of the end-user, improvement in the supplier’s performance and NPD.

Step 2: It involves the search for spirited supplier who can offer high performance and delivery.

Step 3: There is an establishment of performance measurement system to measure the supplier’s performance over the period of time.

Step 4: It deals with the optimization of supply base, involving an elimination of the suppliers who are incapable of meeting the needs of the company.

Stage 2: It deals with solving the issues related with quality, delivery and cost.

Step 5: After successful optimization of the suppliers, a performance matrix is created based on the Quality, Cost, Delivery, Design and Management. Then a team of specialists makes a detailed risk assessment of the suppliers by noting down their strengths and weakness.

Step 6: It involves several remedial actions to remove the supplier’s deficiencies, which are identified from the performance matrix.

Stage 3: It deals with Proactive development of the suppliers

Step 7: It precedes the supplier’s proactive development by establishing an open dialog with the top management of the supplier.

Step 8: It includes several improvement activities like process mapping, training, maintenance, process mapping and joint projects, which are balanced by several award programs, thereby improving the business performance.

Step 9: It provides continuous improvement in the company’s philosophy by encouraging their suppliers to maintain their momentum for improvement. This is done by looking into their performance feedback, which help the suppliers to start their own improvement plans.

Stage 4: This stage involves integrative development, which is to globally align the supplier network.

Step 10: It includes the addition of suppliers into the supply chain network of the purchasing organization. It enables the suppliers to provide input into the NPD and services through sharing of technology.

Step 11: It includes the development of the second tier suppliers i.e. the suppliers to the first tier suppliers.

Step 12: It establishes the integration of the entire supply chain network.

From the above key findings we can draw out 3 results from it

Improvements in performance and capabilities of the supplier

Improvements in Buyer supplier relationship

Improvements in managing the suppliers by the buying organisation

1.3) Case Examples

Nissan’s approach (Southey, 2009)

Nissan has formed its suppler development on the basis of continuous improvement over a long term with the same suppliers as they have mutual trust with them.

It involves its suppliers in the initial stages of design process so that it would help them in achieving world class standards and strategic goals of being a successful company.

It has a supplier development team whose job is to evaluate the supplier’s performance on the basis of Quality, Cost, Delivery, Development and Management (QCDDM). They monitor the supplier’s performance against their own standards and then select the best out of them and address the weak performers to improve their productivity and reduce defects.

There were several key factors like their management of continuous improvement, good bidirectional communication, open relationship and involving staff at all levels.

2) Supplier Development at Honda (Japanese)

2.1) Infrastructure and Management

As per (Sako, 2003), there are 3 basic principles which are undertaken by Honda

Free competition: buying cheap and good products from any part of the world

Supplier’s managerial self confidence: achieving the balance between needs of the Honda as well as the customer base.

Equal partnership: avoiding the sponsorship that characterize the relationship

It places purchasing philosophy in the background for its Supplier development activity.

By 1973, Honda developed linkage with group of suppliers by shareholding or by long term linkages in order to deal with 16 fold increase in its car production. But with no growth projections in the industry, Honda realized the necessity to cut the cost of the materials so as to survive in the market.

This extended to the inspection of capital equipment and production process. So, a group of 8 supplier companies were identified by a team of 7 engineers from Honda, this activity was known as Soft Best Position (SBP). Then they started changing the layout and maintaining the shop floor, so as to make it compete globally. So there was a need to work together to increase their performance by giving priority to quality or profits, as giving instructions to the suppliers could not work. This made Honda to form a Kaizen team containing suppliers and the engineers.

Honda’s activity of supplier development is BP, which means Best Process, Best Profit, and best Practice and so on. There are 2 types of BP which Honda undertakes

Soft BP: In this, changes are made without any capital investment, which are made after doing the first job. It results in small improvements (kaizen).

Hard BP: It is achieved through new capital investments as it starts from pre-production stages, about 2 years before the actual start of the first task. It delivers higher jumps in performance improvement (Kaikaku).

So HBP became very popular and an ultimate weapon to avoid productivity bottlenecks and the bringing of special robots has helped Honda in increasing its line speed.

Three SSP suppliers work under 1 engineer who provides guidance to these 3 firms. A Large Project Leader (LPL) and a Project Leader (PL) is assigned to every SSP supplier, who sets their performance improvement targets and monitor their progress as well.

According to (Maloney, 2000), there were several benefits from the Honda Trading supply chain

Quality assurance

Availability controlling

Guaranteed delivery

Consistent material pricing

Based on the manufacturing projections, the purchase orders are issued to the suppliers and then they determine the materials that are needed and send the request to the Trading department of Honda. Then they issues purchase orders for the raw materials, which are received by mills, who delivers plastics, aluminium and steel to the respective suppliers. After the manufacturing, the parts are delivered to the assembly plants of Honda.

Mr. Greg Norval, the senior manager of Honda trading, said, “We give the suppliers annual pricing for their raw materials, that way we can fix the cost for parts that will go into each model-year car. It’s a win-win for parts makers and for Honda” (Malony, 2000).

2.2) Kaizen at Honda

It’s a Japanese word for continuous improvement. It helps in providing the employees a channel so as to contribute in the development of the company.

Honda claimed Kaizen to be voluntary and paid more interest on suggestion systems with higher potential mobility (Brunet and New, 2003).

The kaizen activity of continuous improvement was also performed on a chosen model line and was concentrated on forming groups with other suppliers in the same division, in order to take some actions in bringing improvements to the model lines at one of the suppliers and applying the achievements got from the model line into other production lines in the company of the supplier (Sako, 2003).

In order to prioritize more incentives, Honda was reducing seniority amongst employees and providing them retirement benefits and healthcare and also raising their salaries so as to make them feel confident. Thus, it would provide high levels of motivation beyond any direct rewards for Kaizen activities (Brunet and New, 2003).

2.3) Honda’s Philosophy

Entrepreneurship and Innovation are the strong factors till date and so it has a “go it alone mentality”.

On seeing its current line up, there is a reflection of creativity and youthfulness which comes out from the company (Upwards, 2004).

2.4) Strategy

Global Flexifactory

As per (Mair, 1994), Honda is the leading master in developing flexifactories, which plays a significant role in its corporate strategy both regionally and globally. Honda is largely known for its marketing and manufacturing strategy.

Flexifactory means the act of a factory in making changes in its products rapidly by putting low cost and with great ease.

Characteristics of Flexifactories

It’s an ability of making more than 1 model simultaneously in a factory

Frequent introduction of new models

Flexibility in employees to increase fluidity

Geographical flexibility is attained through Planning

Operated as a system to stabilize their capacities

Due to the network of flexifactories, Honda is considered as a Flexible company. It plays an important role in organizing the global manufacturing operations of the company. (Mair, 1994)

2.5) Organizational Structure

According to (Mair, 1998), Honda is considered as a successful learning organization. It is also categorized by Innovation, decentralization of responsibility and individualism. According to Ohmae, there is no organizational chart in Honda as known so far except the fact of its employing of project teams frequently, who are innovative.

The reason for having a flat hierarchy is the employment of young research engineers as it gives a feeling of high independence. It was all done by Mr. Honda with the passion and desire to succeed, that made it into a multinational Giant. There was a strict channel in which the workers operate, which provided an equality and democracy so as to function efficiently and effectively.

Several production equipments were designed by the workers themselves like automating the entire body panel and assemblies without any supervision (Mair, 1998).

Honda is able to produce high quality products in lower cost, providing superior customer value (Leong and Ward, 1995).

2.6) Relational capabilities

Honda includes its suppliers in the early stages of product design to ensure better quality, short lead times and lower cost from them (Offodile and Arrington,1992).

A commitment is required from both the buyer and supplier towards the collaborative work that they do together. Honda does this by sending its executives to the presidential level showing them the way, the suppliers does their work and expect their involvement when any need arises (Vereecke and Muylle, 2006).

Honda in West, mostly gives emphasis to innovation and individual

proposals (Naylor, 2000). In US it does informal meetings and formal

briefings with their suppliers so as develop trust among them (Cousins,

et. al., 2008).

The Honda Manufacturing in UK (HUM), is the hub of its operations in the largest market of the world (Mair, 1998). Due to HUM, Rover developed a partnership with Honda, which played an important role in its entry into European market.

There was an introduction of small batch production system in HUM, which was different from one piece flow system in Japan. They assign responsibilities to all the employees to work cooperatively in a team within the production system (Mair, 1998).

3) Supplier development at GM (Western)

3.1) Management and Organizational Capabilities

GM is the firm which produces around 60-70% of the components internally and that’s the reason it is said as a highly vertically integrated firm, as they use arm’s length relationship instead of partnership. One of the GM’s executive said “We don’t know what a supplier partnership gets you. It just locks you in. We don’t even like using the word partner” (Dyer, 2000; pp: 25). But this approach was highly outdated leading to several losses in their share value.

GM also uses almost 10 times the number of suppliers as compared to Toyota, which often compensate with the benefits and also reduces the capability of suppliers to attain the desired level of economies (Dyer, 2000).

As per the inventory level, GM has about 4 times of supplier inventories as compared to Toyota (Dyer, 2000; pp: 44).

GM is well known for its slowest product development cycle times yet it keeps its information on its lead time to be a secret (Dyer, 2000; Pg: 134).

GM always attempted to keep its input price to be low by preserving size and bargaining power over suppliers.

GM always places new set of procurement rules and policies whenever it introduces new management (Dyer, 2000; Pg:99).

The suppliers of GM deliver their products only 1.5 times a day. Also, it has only 0.2 guest engineer for each supplier.

According to (Teresko, 2000), GM’s vice president, Ralph Szygenda wanted GM to be transformed into digital enterprise, so as to broaden and transform the strategic alternative for GM.

Thus GM’s management supported the strategic sight of IT, which made them to increase their efficiency and reduce the cost.

Standardization was introduced with only 1 CAD system which improved the product development cycles as it got reduced to 18 months, which was used to be 4 years in the past, producing about $1 Billion savings. So there was a chance in fulfilment of the vehicle order from 76 days to 40 days.

Also they cleared all the clutters before introducing a $1.7 billion on internet based applications, which made them to spend about $600 million less on IT.

So, more than 200 Information officer and business specialists were recruited for product development, production, marketing and supply chain to provide solutions.

To meet the customer’s requirement, they developed a website GMBuyPower.com for consumers to buy cars online.

Thus GM was able to integrate technology with the business which was all due to the successful hiring of the people. Due to this GM was again labelled as “Big and fast” from “Slow and Bureaucratic.”

3.2) Ineffective Partnerships

GM also involved in partnerships with several research institutions so as to enhance its competitiveness by bringing new ideas and knowledge. Also GM’s R&D management developed a model to understand partnership functioning (Sengir et al., 2004).

GM offers narrow statements concerning partnership behaviour to assure partnership success. Joint work in GM supports the partners associated with it despite of the problems during the partnership cycle.

There is a need to build trust in undergoing any sort of partnership as it’s the most essential thing for it to be sustained (Sengir et al., 2004).

3.3) Conflicts

There were several conflicts regarding the technical directions of what needs

to be achieved and what’s not, which were faced by researchers. Also, due to

cultural differences between them which arose from either individual

interactions or from hierarchy structure. This created a risk in the entire

structure of the relationship. There was a difference in opinions of

both Research University and the GM researchers which lead to

increase in conflicts. This resulted in low communication frequency.

Thus we can say that they reported good cooperation while partnership cooperation was low (Sengir et al., 2004).

3.4) Unstable Network

Both GM as well as its suppliers, kept their innovations proprietary. GM employed so many suppliers for the reason that was told by an executive of GM “Our purchasing activities are huge and extensive. Most activities have been geared to making sure we don’t get stung by an unscrupulous supplier out there.” (Dyer, 2000; Pg: 96).

Also GM didn’t develop a stable supply network, which resulted in the overlapping knowledge bases, dense interactions and no sharing of information and knowledge with their suppliers. This made the suppliers to refuse engaging into these activities which costs a lot, without giving any actual benefit (Singh and Dyer, 1998).

Due to the various hierarchies, GM’s internal supply divisions were unable to make the decisions on the investment and the capital spending, independently as it needs to be authorized at the corporate level. Thus, they felt cash constrained and so less than 1% was spent on R&D (Dyer, 2000; Pg: 56).

3.5) High labour cost

GM produces about 35% of its parts internally, including labour cost of

around 15%. This makes an overall loss to GM of about 5% (Dyer, 2000;

Pg:56).

Thus, managing large number of suppliers could lead to increase in the

perceived transaction costs, which could be reduced on decreasing the

number of suppliers. So GM is also reducing the number of suppliers so as to

get rid of its costly engineers and accountants to track the large number of

suppliers. This made GM to reduce cost by encouraging supplier competition

which can make GM to save around $4 billion (Kim and Mitchell, 1999).

3.6) Knowledge Sharing

GM does the knowledge sharing with other suppliers for only 6 days (Dyer, 2000; Pg:79).

“A GM manager stated that, on average, 100 to 200 improvement ideas are generated by the development team during a typical workshop brainstorming session” (Hartley and Choi, 1996).

If the supplier wants to make any major changes in the current running processes, then they have to take the permission from the customer, which was difficult to obtain and was time consuming and often requires significant downtime as well to make any changes. So they generally felt constrained, working in that kind of environment (Dyer, 2000; Pg: 83).

GM, during its face to face with the suppliers, spends about 47% of the time in non productive activities because of their act of bidding frequently about the price negotiations, which takes more time to solve and about 53% additional time in productive activities (Dyer, 2000; Pg:94).

3.7) Relational Capability

GM interacts with the suppliers only formally and gives them the instructions about what needs to be done, and there was low level of communication between the two.

GM allows their suppliers to deliver large number of inventories and for this, they often get dramatic fluctuations in their forecasts, during the last 3 days before production to about 20% (Dyer, 2000; Pg:83).

GM usually sends a team of consultants called PICOS, to its suppliers in order to help them in increasing their productivity. (Dyer, 2000; Pg:97).

Due to the frequent rotating of the large number of suppliers, none of the suppliers were able to achieve crucial cost benefits, thus destroying their experience curves (Dyer, 2000; Pg 141).

Also GM’s suppliers declined to make any long term assets in capital equipment.

In 2000, it strategically got associated with Fiat and established procurement, based on the equity swap by undertaking of 50% assets for purchasing of around $32 Billion per annum. Their aim was to improve the quality standard by lowering the cost (Jung and Lee, 2006).

GM is also less trustworthy organization in terms of its transaction costs, which are higher than that of Toyota. So (Dyer, 2000; Pg: 96) says that Trust is the most important factor, which gives lower costs of transaction to the buyer-supplier relationship

4) Difference between Japanese and western Approach

The association between the suppliers could be either co-operative or competitive (Southey, 2009).

The Japanese approach (Honda) follows the cooperative policies which involves stable and long term relationships with their suppliers leading to mutual dependence. Also the responsibilities are shared in a cross functional way in every department.

Western approach (GM) follows competitive policies, which gives the benefit to some alternative supplier who is always available and hence reduces the dependence on a single supplier so it is multi sourced. It interacts with its suppliers through formal programs and acknowledges their efforts by giving incentives.

In western approach mostly the negotiations are win-lose because of their competitive behaviour. While in Japanese, the negotiations are win-win because of their co-operative behaviour.

The Japanese develop small and trustworthy supplier base and gives them a chance to grow and turn into world class. Western approach deals with large number of unreliable suppliers as they believe in alternatives.

Western people have their focus onto meeting the required standards from the supplier and often reject any part which is defected while Japanese do the reverse of it as they rectify their problems first so that it is prevented in future.

Western approach prefers products made in lower cost while Japanese approach has more focus towards higher quality of the product.

From the above analysis, I can say that Japanese approach delivers better results as compared to the Western approach as it’s more trustworthy, involves high level of Buyer-Supplier communication and delivers positive results than that of Western approach which is too complex to handle.

5) Supplier’s perspective

Suppliers always look out for different ways of increasing their business and profit margins. According to suppliers, GM was the least trusted organization. Also its procurement cost was significantly higher (twice) than that of other manufacturers like Toyota.

The suppliers also do not provide them new designs because of their habit of transferring the copies of it to their competitors in order to get it done for lower cost. So the suppliers have no trust in GM at all (Dyer, 2000; Pg:97).

The suppliers didn’t want the PICOS team of GM to inspect the problems as the team was more concerned with negotiating about the price decrement rather than finding and solving the problems. Also they were unwilling to accept any support from them, due to the lack of trust on GM (Dyer, 2000; Pg:97). The lack of trust is also due to the frequent changes in its management rules and policies and also due to its competitive bidding, which makes the suppliers feel like temporary members, not an important member of the value-chain(Dyer, 2000; Pg:101). So, there is always a fear of getting thrown out during the model change (Dyer, 2000; Pg:103).

As per suppliers’ perspective, GM’s Philosophy is its own profit, its strategy is Vertical Integration and arm’s length relation and its approach is competitive, which was not liked by suppliers at all.

On the other hand, if we put Honda and Toyota then the story is quite different as their philosophy is to develop long term relations and trust with the suppliers and the strategy they follow is the partnership principle with a Japanese approach of early involvement of the supplier and knowledge sharing. This attitude of involving directly with supplier gives the supplier a feeling of trust with the company and willingness to work and so the suppliers ranked them as their preferred customers. This can be seen by the Figure 1.

Supplier

Chrysler

GM

Ford

Nissan

Honda

Toyota

Willing to Share New Tech w/o PO

2.2

2.3

2.5

2.9

3.3

3.5

Willingness to Invest in New Tech

2.7

2.8

3.0

3.3

3.9

4.0

Trust of OEM

2.2

2.3

2.6

2.9

3.7

3.7

Preferred Customer

2.7

2.8

3.3

3.7

4.9

4.8

Figure 1: 2008 Working Relations Index Data (Hedge, 2008)

And from Figure 2, we can see that Toyota and Honda have made their concern on the profit margins of its suppliers and also gave them an ability to recover their material costs and allocate them charge-backs.

Supplier Perception

Chrysler

GM

Ford

Nissan

Honda

Toyota

Fair ROI

2.4

2.5

2.6

2.9

3.4

3.3

Ability to Make Profit

1.3

1.4

1.6

2.0

2.9

2.9

Ability to Recover Material Cost

1.6

1.7

2.1

2.3

2.9

2.8

Fairness in Charge Backs

2.4

2.3

2.6

2.5

3.2

3.0

Figure 2: 2008 Working Relations Index Data

According to the working relation index, the suppliers gave the rankings to various companies in terms of their:

Degree of trust

Helping the suppliers in reducing cost and improving quality

OEM’s openness and honest communication

Managing the profit of the Supplier

Providing timely information to the suppliers

Suppliers’ involvement in product development process

According to this, suppliers ranked Toyota and Honda to be the most preferred ones and GM and Chrysler to be the least trusty organizations, in terms of supplier working relations (Hedge, 2008)

So the suppliers’ prefer the Japanese OEM’s to be far more reliable and preferable over the western OEM’s.

6) Success and failure

Success of Honda

Success is defined as an act of achieving the desired results or outcomes (Thorne, 2000).

The founder of Honda, Soichiro Honda expresses that it is the failure only through which success is achieved. He also quoted that Success is equivalent to 99% failure.

He entered into the market with a small engine attached to a bi-cycle, making it a motorcycle which proved to be a great success. Then he started making sports cars frequently faster than Toyota.

Its success in the world due to its ability to set up an efficient distribution network for all its products and this is enhanced by effective IT supported controlling and communicating systems. For this it is well-known as an expert in its technology and designing of the engines (Thompson and Richardson, 1995).

Honda introduced its new products at a fast rate and defeated Yamaha by maintaining and reinforcing its lead (Turpin, 1992).

Honda’s empire is extended over to 120 manufacturing facilities and in 29 countries and has developed its own strategies of managing the organisation which makes them feel proud and refreshing. (Upwards, 2004).

Today, Honda is the fifth-largest car manufacturer in the world, and is in its own league in manufacturing business (Automotive, 2008). 

Failures of Honda

The collaboration of Honda-Rover ended in 1987, due to the sheer gap with which both the companies were running and also due to quality control issues (Oliver and Carver, 2008).

The first hybrid-electric car of the world, made by Honda, failed either because of its conventional look or due to its low