Honda and Bavarian Motor

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Supplier Development at Honda and Bavarian Motor Works/Rover


Purpose: This paper aims to search these types of road maps used for development of suppliers in Honda and BMW/Rover which develop a relationship with theory and practical with regards to supplier’s development.

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Approach: Based on a comprehensive, critical analysis of the theory and concepts of Supplier Development in Supply Chain Management; which OEM has the best approach to Supplier Development.

Findings: The Japanese and Western approach has a 180-degree turn in the processes of supplier development, where the Japanese approach succeeds the western approach fails and where Western succeeds, Japanese fails. Apart from that we have also concluded various perspectives, approaches and philosophies of suppliers towards there respective customers. Furthermore, we have tried to find some successes and failures example related to supply chain management and supplier’s development.

Since the beginning of time man’s struggle of development has been continuously improving. With the discovery of fire and invention of wheel man’s step towards great achievement in industrial revolution and with invention of computer make that revolution more mobilized and advanced. Due to that mobilization, demand for various goods increased and with increase in demand the problem of competition, quality, cost and innovation rises within respective OEMs to cope up with pace of industry. For handling problems such as competition, quality, cost and innovation many OEMs have to change, develop and adopt various new ideas, approaches and strategies for their survival in market. For that really purpose many OEMs from last two decades constantly exploring and defining new ways of total customer satisfaction. by designing roads maps with their suppliers in form of supplier’s development through technology, financially and mentoring.

BMW and Honda have one of the best Supply Chains in the world and the critical analysis of them both has provided the evidence that why they are best at these processes. Supplier Development process at these OEM’s is considered as a critical backbone to their production lines; to handle their production problems with suppliers they developed and evolved these processes so they can serve the purpose with full capabilities. The theory and practice at both OEM’s has been analysed and how these OEM’s are able to develop, implement and maintain their Suppliers. Furthermore, it has been tried to research the perspectives, concepts and potential capabilities of suppliers to evolve in the supply chain.

Chapter 1
Supplier Development
1.1 Introduction:

Even though the basic notions of supplier development can be traced back to ancient times and consumer and military buying aspects (Leenders, 1966), it was used more

intensively during and after World War Two by Toyota in Japan. In 1943, Toyota joined a supplier association (renamed thereafter Kyoho Kai ) to assist a number of subcontractors in the Tokai region in improving productivity (Hines, 1994). From then on supplier associations within the Toyota supply network and collaboration between Toyota and its suppliers grew constantly (Dyer and Nobeoka, 2000; Hines, 1994). With some exceptions, such supplier development played little part and was not widespread in the Western economy until the 1990s (Hines, 1994). From then on, firms in the automotive industry pressed ahead with this practice and turned it into a popular and powerful approach to improve supply chain performance in Western industries (Lamming, 1993; Womack et al., 1990).

Other chronicled examples of supplier development practices applied subsequently by firms outside the automotive industry are, for example, John Deere, Harley-Davidson, Digital Equipment Corporation, Motorola, or Marks and Spencer (Golden, 1999; Hines, 1994).

1.2 Definition of Supplier Development:

According to Burt, Dobler & Starling (2003: 514) “Supplier Development can be defined as any activity that a buying firm undertakes to improve a supplier’s performance and capabilities to meet the buying firm’s supply needs”.

According to CIPS ( , 24-03-09) “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”.

According to Watts and Hahn (1993:12) Supplier Development programs are defined as “long-term cooperative effort(s) between a buying firm and its suppliers to upgrade the suppliers’ technical, quality, delivery, and cost capabilities to foster ongoing improvements”.

Krause and Ellram (1997:21), supplier development encompasses “any effort of a buying firm with its supplier to increase the performance and/or capabilities of the supplier and meet the buying firm’s supply needs”.

1.3 Genera Steps for Supplier Development:

Burt, Dobler & Starling (2003: 518, 519) “No two companies approach supplier development in exactly the same way. However, according to Nelson, Moody and Stegner most effective project adhere to the following 12 steps

* Identify and review performance gaps

* Discuss specific about how the project will be approached and implemented

* Work to achieve mutual agreement on project focus

* Identify processes that result in waste

* Compare performance gaps with the desires state

* Establish project metrics and metrics baselines

* Gather and analyze data

* Develop improvement strategies

* Develop an implementation plan

* Calculate the return on investment

* Create and review a proposal with supplier’s management

* Execute the improvement plan

Handfield et al. (2000: 42 ) recommended that the initial supplier development project be one that is fairly simple and likely to succeed so that the ‘biggest quick fix’ and the ‘greatest good’ can occur.”

1.4 Reasons for Supplier Development

CIPS recommends ( , 24-03-09) “that purchasing and supply management professionals should be able to identify sound reasons for embarking on supplier development process such as:

* improving supplier performance

* reducing costs

* resolving serious quality issues

* developing new routes to supply

* improving business alignment between the supplier and the buying organization

* developing a product or service not currently available in the marketplace

* generating competition for a high price product or service dominating the marketplace

Supplier development should lead to improvements in the total added value from the supplier in question in terms of product or service offering, business processes and performance, improvements in lead times and delivery for instance”.

According to Sako (2004: 290) “the most limited aim of supplier development is to intervene in order to teach ‘maintenance capability’ with respect to a specific component. At the other extreme, the most ambitious aim is for a company to replicate at its supplier a whole set of organizational ‘routines’ underlying its own evolutionary capability”. There are two dimensions of capability: type and scope. Sako divides “type” into three categories:

* Maintenance : the capacity to sustain performance

* Improvement : the ability to improve performance and the pace at which improvement takes place, and

* Evolutionary: the highest type, which is the ability to acquire new capabilities.

The other dimension, scope, describes the level of activity ranging from a work cell in one factory to the entire organization.”

1.6 Supplier Development & Collaboration:

Burt et al.(2003: 517) “World class supplier development requires a commitment to collaboration between customer and supplier. The commitment must be approached with mutual benefit in mind. Effective supplier development is more than getting cost reductions for a particular part; it means helping suppliers remove wasteful costs from their processes. The strategic intent is to create win-win opportunities wherein both the buyer and supplier gain. For collaboration in supplier development to be successful, the collaboration must have:

· Commitment,

· Communication

· Measurement

· Trust

1.7 Supplier Development Process

Handfield et al. (2000: 39, 40, 41) “After scanning supplier-development strategies used in more than sixty organizations, we developed the following seven-step generic process map for deploying these initiatives. Other case studies of supplier development efforts describe variations of this model. Most of the organizations studied deployed the first three or four steps, but they were less successful with the remaining steps.

Step 1: Identify Critical Commodities

Not all companies need to pursue supplier development. Some may already be sourcing from world class suppliers because they have made effective sourcing decisions and supplier selections. Or their purchases may be so small in proportion to total costs or sales that investing in suppliers is neither strategically nor financially justifiable. Therefore, managers must analyze their situation to determine whether supplier development is warranted and if so, which purchased commodities and services require the most attention.

To focus the effort, a corporate-level executive steering committee must assess the relative strategic importance of all goods and services that the company buys and produce a “portfolio” of critical commodities (products or services essential for success in a targeted industry segment). This assessment is an extension of the company’s overall corporate-level strategic planning and should include participants from the functions affected by sourcing decisions (finance, marketing, information technology, accounting, production, and design). 1.1, matrix used to assess the relative importance of company purchases

After classifying commodities accordingly, the resulting portfolio consists of clusters of “noncritical supplies,” “bottleneck supplies,” “leverage supplies,” and “strategic supplies.” Commodities in the “strategic supplies” category are considered strategically important, difficult to substitute or purchase from alternative suppliers (often due to an oligopolistic market), important to purchasing overall, and purchased in relatively high volumes. These commodities become the targets for individual study by dedicated commodity teams.

Step 2: Identify Critical Suppliers

Next, managers must assess how suppliers of strategic supplies are performing to determine which ones to develop. A common approach involves a Pareto analysis of current supplier performance (see 1.2). In this case, the underlying axiom is that 20 percent of suppliers is responsible for 80 percent of the poor performance. Thus, Pareto analysis is useful in identifying suppliers with potential for development, as well as those that are underperforming, low-volume suppliers.

Identifying poorly performing suppliers requires systematically analyzing supplier performance data. Many leading companies monitor supplier performance on a plant-by-plant basis, ranking suppliers from best to worst. They target suppliers that fail to meet minimum performance objectives in quality, timely delivery, cost, technology, or cycle time for analysis and eventual supplier development. The buying firm meets with supplier representatives to determine the cause of the problem(s) and the required corrective action(s). If supplier development is warranted, both firms must harness the resources to drive the improvements. If improvement is not forthcoming, the item(s) may be sourced from an alternate supplier.

Step 3: Form a Cross-Functional Team

Before approaching suppliers to ask for improvements, a buyer must first develop internal cross-functional consensus for the initiative. Such consensus shows the supplier a “unified front” and ensures that all buyer functions send the supplier consistent messages. Purchasing executives continually emphasize that improvements begin from within through “buyer-focused” activities. A buyer must have its “own house in order” before expecting commitment and cooperation from suppliers. Furthermore, to optimize supplier contributions, a buyer must first establish its supply-chain strategies and roles of procurement so that its business objectives are clear.

Step 4: Meet with Supplier Top Management

Next, the buyer’s cross-functional commodity team approaches the supplier’s top-management group and establishes three keys to supplier improvement: strategic alignment, measurement, and professionalism. Strategic alignment requires not only an internal business-technology alignment but also buyer-supplier alignment that focuses on each customer’s requirements throughout the entire supply chain. Supplier measurement requires a total cost focus as well as credibility and participation of purchasing and other key technical functions (such as engineering, quality, information systems, and manufacturing) in both organizations. Approaching a supplier’s top managers with a good business case for improvement sets a professional tone that reinforces the relationship, fosters communication, provides specialized expertise, and develops trust.

Step 5: Identify Key Projects

After identifying promising opportunities, managers must evaluate them in terms of feasibility, resource and time requirements, and potential return on investment.

The goal is to decide whether they are achievable, and if so, what the goals should be. Additional criteria used to evaluate opportunities include willingness and ability of supplier (and buyer) to implement changes, duration of product/service life, strategic importance of the product/service and its impact on the business, return on investment, impact analysis, and standardization.

Step 6: Define Details of Agreement

After identifying a potential improvement project, the parties need to agree on the specific metrics for monitoring its success. The metrics may include percent of cost savings to be shared, percent of quality improvement to be achieved, percent of delivery or cycle-time improvement desired, key product or service performance targets, technology availability, and system implementation targets. The agreement also must specify milestones and deadlines for improvements as well as the role of each party who is responsible for the project’s success, and how and when to deploy the allocated resources. Upon reaching an agreement, the project begins.

Step 7: Monitor Status and Modify Strategies

To maintain momentum in the project, managers must monitor progress and constantly exchange information. Revisiting objectives after attaining a milestone may bring to light the need for new or revised objectives. The parties may need to modify the original plan because priorities may change and additional resources may be needed. In short, the strategy must be revisited to stay “in sync” with events.”

Chapter 2
Supplier Development at Honda & Bavarian Motor Works/Rover
2.1 Supplier Development at Honda

Supplier Development is a rigorous process and Honda is amongst the best, Japanese approach cases to be discussed. Honda approach to supplier development is called BP.

2.1.1 Philosophy of Supplier Development:

“BP Stands for Best Position, Best Productivity, Best Product, Best Price, and Best Partners”. (Nelson 1998:4)

This program was based on 13 weeks after which the supplier was self sufficient to run things in coordination with Honda for better results which improved the supplier business creating an automatic effect on Honda’s production. This philosophy has been carried out throughout Honda since 1976. Another philosophy of Honda for problem solving is 3 A’s according to Nelson “To understand the problem go to the actual spot, examine the actual part, and see the actual situation.” (Nelson 1998:13). So far the capability and philosophy of Honda seems strong to motivate and ignite the process of change.

2.1.2 Approach Towards Supplier:

The need for change at an organisation is carried out after careful observation of processes, to improve to those processes one needs to concentrate on actual problem and plan to improve it so what Honda suggests is; Nelson “Honda’s game plan of assembling less and less on the assembly line and relying on its suppliers to ship in more integrated modules.” (Nelson 1998:24). The most important thing to note is that Honda team always went to the suppliers premises and implemented this programme there, so that the concept of a partnership remains intact.

So to rely on its suppliers an organisation needs to establish a high level of trust on its suppliers; to develop trust there needs to be communication, information exchange between the organisation and its suppliers.

Leadership involvement: The leaders at Honda felt that they should expand their horizons and in order to do that they needed a program; which should be able to adapt and expand with the passage of time.

2.1.3 Partnership:

The concept of Partnership at Honda is very simple when a supplier has committed to the supplier development programme, they commit to being the best supply base for Honda. So the agreement comes to a partnership for 50-50 which is then implemented as that cost management and cost sharing; the profits are invested into improving their processes and overall the profit is shared which then helps Honda and the supplier to raise their stocks. As Nelson briefs “Honda sees no better embodiment of the partnering spirit than this approach to producing benefits.” (Nelson 1998:175)

2.1.4 Supplier Selection:

Supplier Selection at Honda is a very precise process “Nelson (1998) talks about a supplier selection matrix”. First of all according to precise and exact parameters selection is based on either a supply base or a commodity; this is determined through selection criteria; which are decided upon either units per dollar, delivery processes, quality of parts and the number of rejects, and target cost versus actual cost. “Nelson (1998) briefs; BP team then fills the matrix according to their criteria based on the supplier capabilities which then allows them to rank the options”. Suppliers who then achieve top scores are not selected automatically; they are then considered for long term relationship regarding commodity, strategy, future analysis of program life of supplied parts and past working relationships.

2.1.5 Structure:

Honda has an inorganic, informal structure where everyone is treated equally; the employee is called an associate. Honda is very specific about this rule and as “Nelson explains (1998) introduced the concept of management of walking about in which the floor manager is scheduled to be at places on the manufacturing line at part, instead of being called if some problem appears”. Honda not only maintains this structure at their premises but it is a part of the Honda’s supplier development programme which not only includes the programme of cost reduction, quality improvement, delivery processes, manufacturing line processes, and quality but also the structure of the organisation.

The role of leadership at Honda has been very positive and encouraging to come up with new ideas; they won their trust by confiding in them and motivating them to tell them what problems they were facing and what sort of problems they have had on the manufacturing line as “Nelson (1998) narrates the story of reyonessa project where an associate roccio was encouraged to tell them her problem and after a slight adjustment with her process they had increased her efficiency.” This is a perfect example of how Honda sets up the supplier development programme and makes it work.

2.1.6 Goals, Targets and Results:

The goal of Honda is very clear and elaborated on supplier development which explains the concept of supplier development for Honda, according to Nelson “to create highly productive, cost effective manufacturing method-draws on the knowledge of production associates.” (Nelson 1998:146) The target of Honda was to create a world class supply base and for that matter they involved all of their suppliers to take up BP programme and encouraged their motivation to be a world class supplier, so the supplier development programme demanded some serious commitment, results within a specified time. So in 13 weeks time the supplier was made to practice the different techniques and tools; which then allowed them to evaluate the processes and the percentage of efficiency; some processes got efficient up to 45% and as “Nelson (1998) briefs that in reyonessa project the efficiency of the plant was increased by an estimate of 46%.”

2.1.7 Supplier Empowerment & Self-Reliance Strategy:

Honda’s programme of supplier development ‘BP’ had the purpose of equipping the supplier with self reliance so that they can rely on themselves rather to look up to Honda again and again; Honda teaches the 1st-Tier supplier to be self reliant with all the other functions of supplier development and this serves well under the agreement that supplier-customer will pass this strategy on to 2nd and 3rd-Tier suppliers. Nelson briefs that “long term, Honda wants a stronger, competitive supply base whose self reliance ensures continuous improvement” (Nelson 1998:147)

Supplier Empowerment and self-reliance are both interlinked. According to Purchasing Magazine “This is the crux of Honda’s strategy, both in general marketing and supply base management. Honda believes the old axiom, “if you give a man a fish, you feed him for a day, you teach him to fish, you feed him for a lifetime.”” (Purchasing Magazine c1995) Honda’s goal is for suppliers to reach a level for understanding and implementation of Honda’s manufacturing philosophy where the supplier no longer needs help.” In another part where Nelson states “Team’s partnering relationship with supplier associates, as everyone begins to understand that they are not assembling or making parts -they are building a Honda(italic in text).” (Nelson 1998:147)

Leadership in the lean enterprise holds a strategically important role as Nelson explains “Honda supplier development philosophies are built on the idea that teaching suppliers how to perfect their process and how to become self reliant, rather then hammering cost savings, will yield long-term, permanent results.” (Nelson 1998:203)

2.1.8 Management Tools and Techniques:

There are always certain set of tools used for any process and for the supplier development process at Honda the tool used is BP which is “BP stands for Best Practice, Best Partners, Best Position, Best Productivity, Best Product, and Best Price” (Cited et al Nelson 1998). Amongst all the tools the most important tools and practices that Honda team has consist of some of the tools which are BP, COPDS, 3A’s, Management by walking around, PDCA. Supplier development is a rigorous process; first thing which Honda does is to change the working environment by changing the attitude of the people which is to first of all, call employees: associates.

Then the next step is to release the creativity of the associates and motivate them to come up with ideas because Honda believes that no manager can better know the problems being faced on the supply or production line then the associate itself, they came up with simple techniques which include COPDS: cleanup, organise, pickup, discipline, safety, the main strategy is the visibility strategy; which is everything should be visible and in order so that there might not be any problem picking that up and putting it on the assembly line and everything should be easily accessible which includes all the tools, modules and parts for the manufacturing.

Supplier management meetings and arrangement of a war room where the associates were supposed to meet every day for short meetings and briefings before going to manufacturing line, these meetings at first consisted of the Honda BP implementers and the associates of supplier but afterwards when the supplier was self reliant this room was dedicated to meetings before starting the shift.
2.1.9 Learning and Knowledge transfer through Supplier Development:

Learning through Honda’s supplier development programme has been of great essence for most of the 1st-Tier suppliers as after improving their own processes they have turned to their suppliers and offered them the same programme so that they can also become lean and follow the same rules of supply chain management, when supply chain is effected at some point, it is overall affected from top to bottom. The knowledge transfer process at Honda comes from following all the tools & techniques of supplier development programme because once someone starts practicing these processes and comes to the conclusion of how it has affected their progress; what difference it has made to their work, they adopt the process and live with it.

2.1.10 How Honda takes on supplier development?

In view of the author Honda OEM has a very serious concern with suppliers and their development, hence they not only select suppliers but give them the opportunity to become the best; Honda believes in single sourcing per commodity or supply base and since single sourcing can be a disaster yet Honda has pulled it off and made it work for them. The most important point in single sourcing is that Honda has made sure that their suppliers will also make sure of their on time deliveries, reduce overheads, keep up with schedule and fully utilise the JIT and Kanban. The only point to make is that this OEM is not only making it for itself but also for its supplier which leads them to a mutually beneficial, understandable and firm agreement which not only leads them to gain full confidence in their suppliers but also the suppliers to have confidence in their customer.

2.2 Supplier Development at Bavarian Motor Works (BMW)/Rover

Supplier Development at Bavarian Motor Works ‘BMW’ is carried out by an approach which is most suitable according to the nature of project and time to do business with their suppliers. BMW had moved towards ‘Order To Delivery’ (OTD) which is a customer-order-driven process, and the time is set to 14-21 Days (Cullen 2002 cited in Zhang et al. 2007) which in view of author clearly declares that OTD means that in order to achieve it the relation with supplier should be very strong and there should not be any communication gaps between supplier and customer.

Supplier development has always been innovative in case of BMW, because every time they have improved their process and brought something new to the table.

2.2.1 Supplier Development Approach:

The philosophy of supplier development or supplier development approach used by BMW; which as researched is used in Germany by BMW as ‘process consulting’ approach. Handfield cited et al. (2008:172) but in North America they had to change their approach by making slight modifications to this process. BMW used this approach differently in different regions; they did not use any rigid method so that they did not implement same process everywhere but always made modifications to the system, which means that they never had a consistent but variable method of developing suppliers approach.

Process Consulting approach is useful in a place where the supplier has a very strong idea of what the customer demands, because of the long-term relationship which they have established over the years of partnership. (Handfield 2006:396). According to author this approach used by BMW is very simple in its context but it leaves the supplier in devastation because by comparing the strategy acquired in Germany and North America differently and if it takes years for the supplier to develop then it is quite obvious that it will take suppliers years everywhere else. But still BMW had been outsourcing; up to 80% of its parts Quinn(1999) which means this much percentage of parts were coming from suppliers.. So it can be concluded from this argument that BMW suppliers in Germany are very much developed and whenever they make a mistake BMW’s response to them is much more different then the suppliers in North America.

BMW Suppliers in North America were properly guided and they were made to see that it works in both directions so both of the supplier and customer have to build a relationship which works long-term; those suppliers were not only told by BMW that their processes needed some modification or they need to improve their processes to produce quality products like the suppliers in Germany but they were told every aspect of the product so that they can solve the problem; which gives the suppliers chance to provide

2.2.2 Supplier Performance:

BMW still relies and uses ‘Pareto-driven’ approach to assist its suppliers (Handfield cited et al. (2008:167). This analysis carried out gives them the details of the suppliers that which suppliers are performing well having the potential of development, or which of the suppliers are underperforming, supplying under-volume per commodity or per supply base, now this analysis simply leads to potential suppliers which are then chosen to do business with and it is very much obvious that a business group like BMW cannot be simply selecting suppliers compromising their quality, cost and customer.

2.2.3 Structure:

The major problem of BMW with its suppliers have been the issue of communication which means that the organisational structure of BMW is not feasible to cope with the supplier’s demands and needs; BMW follows a mechanistic or hierarchical structure where the power devolution is not from Top to Bottom and in these kind of organisational structure with the lack of proper communication these mechanisms come to a halt; in the view of the author this is what is happening at BMW they are still re-evaluating their processes and improve communication and team work, but they are not changing their structure.

2.2.4 Partnership:

Partnership with BMW is very unique; it helps suppliers in all possible ways however, Handfield (2008:167) argues “Bavarian Motor Works, BMW, the car manufacturer, does not provide financial support to suppliers, however it has provided the services of its employees when suppliers require assistance. BMW has sent maintenance engineers, procurement, logistics and quality personnel to suppliers-sometimes for several weeks at a time.” BMW apart from personnel support only provides the suppliers with the equipment to work on their products; which is also owned by BMW because being an OEM the parts should also be made with machines of the OEM.

There are four kinds of suppliers working in partnership with BMW.

1. Core Suppliers who are best-in-class of suppliers list, innovative, best processes; working in a long-term partnership with BMW or having mutual interests with BMW.

2. Concept Suppliers are the ones who have their main focus on innovation having potential of a very fair idea of what they are presenting to BMW because most of their new ideas come from their suppliers.

3. Series Development Suppliers are the suppliers which make sure about the existing concept (product) which BMW has and implementing is up to the mark.

4. Market Suppliers are the ones which are responsible for the standard parts supply for example nuts & bolts. (Weber 2009)

2.2.5 Supplier Development Activities:

The supplier development activities involve steps in which these processes excel and so does the supplier. According to Weber following are Supplier Development Activities at BMW.

1. Process Design includes the improvement of fundamental processes of suppliers and their performance. These processes include all kind of processes including business processes.

2. Supplier Expertise includes the suppliers specific skill or quality which other suppliers may not have; this also includes the suppliers commercial appraisal of its technical expertise.

3. Process Benchmarking includes the comparison of qualitative analysis with another supplier with rating.

4. Supplier Support is essential for the boost required in initial stage of every supplier is required. This is provided on the basis of a long term, stable performance contribution.

5. Project Support is project specific; depending on the problems being faced by the suppliers and process optimisation.

6. Project Assessment is the process for supplier performance by making qualitative project and risk assessment. (Weber 2008)

7. Continuous Improvement is as briefed by Weber (2008) “Project specific procured part cost saving using building blocks: productivity, product value analysis, process value analysis and concept redesign.”

This shows that the suppliers in operation with BMW have been majority from Germany because BMW have not been able to develop the same relation with others like they have developed with the suppliers at Germany. A negative effect of OTD can be Negative Cash Flow because according to ‘Return on Investment Capital’ model this can cause a negative cash flow but due to good partnership where the credit deals can be made, this can convert to positive cash flow, if achieved within time. To improve the process of supplier development and to achieve its required goals BMW released ‘supplier partnership manual’ and encouraged suppliers to show their ‘Roadmap to quality’ (Handfield cited et al. 2008:172)

2.2.6 Sourcing Strategies:

Sourcing strategies ( 6) used in supplier development and existing management of suppliers is a very well organised process which is integrated with each other; using all kind of tools and techniques in supplier selection, development and management. The strategic partners are the ones which are innovating; core suppliers, now the suppliers which are already with BMW are integrated with the ones who have been nominated or selected. All of these suppliers are developed according to the OEM standard.

2.2.7 Management Tools and Techniques:

The tools used by BMW are only Process Consulting and Pareto-analysis ( 3); and this Pareto-driven approach leads them to avoid unnecessary problems earlier i-e before getting worse. This is briefed by Handfield (2000:44) “It identifies problems early and prevents them from worsening, which minimises expending a supplier’s resources and the need for BMW to undertake supplier improvement efforts.” Where as Process Consulting approach works well with the German Matured suppliers but it does not work too well with the American Suppliers because the German suppliers had all their processes in quite a better state then American’s because they only needed a few tweaks. For example Handfield (2006:400) “For example, one supplier set up a paint line, but was unable to meet the different of environmental standards imposed by BMW. They had hired a group of people who had not 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.” BMW did not have this amount of time to spend on suppliers so they had adopted simple methods to screen them out in the first place.

2.2.8 The New Tool of Supplier Performance & Development:

According to a new research a new method developed by BMW is an automated system as briefed by Avery (2008) “The technical purchasing operation at the BMW Manufacturing Co. plant in Spartanburg, S.C., has developed an automated supplier rating system that tracks performance of maintenance, repair and operations (MRO) suppliers.”

This system has the capability of monitoring the overall performance of the suppliers which monitors and allocated the suppliers points by using data of on-time delivery/completion, fill rate, invoice accuracy, EDI/website responsiveness, cost savings and tier-two supplier diversity. (Avery 2008). This has proven to be very much useful as the suppliers have taken it very seriously and at the end of the year there are no suppliers in the red zone or whose ratings have been dropped.

2.2.9 How BMW takes on Supplier Development?

BMW as briefed earlier takes on supplier development very seriously but due to its lack of an organisational structure, lack of communication, and not so very strong methods of supplier selection is not at its best in supplier development because it does not get involved with the supplier thoroughly but just tells them what to do with a very simple approach of telling them what supplier should be looking for, working on with extreme caution maintaining quality and cost and what BMW is trying to achieve; for example as it is briefed by Handfield (2006:399) “setting the standard might involve telling the supplier to hold the part under a light, and examine it at a certain angle to look for marks. For suppliers to understand these expectations, face-to-face discussions, communication, and training are required.”

Now due to the new tool which has been introduced in 2007, it has affected the overall performance of suppliers with BMW to perform better in all their areas and due to this process BMW has been able to achieve its targets; this also shows that the role of Information Systems is very important in the Supply Chain because by the use of this automated system. However, still suppliers need more practical help than only theoretical but BMW does not have that amount of time to spend.

This new approach being used by BMW has made revolutionary improvements to the supplier development model they, unlike other OEM’s, BMW has used different approaches to supplier development, the tools, techniques and processes may be same to some extent but mostly there is always some innovation in BMW’s approach to supplier development which has helped them in continuous improvement and this approach of theirs has led them towards becoming the leading OEM’s.

Given below is the example of one of the suppliers of BMW i-e AUTOSAR and the suppliers and Customers which AUTOSAR has:

Chapter 3
The Difference between Western & Japanese Approach

Supplier Development may seem like a simple approach of partnership, profits, communication, logistics, and supply demand principles. But this is not as simple as it may seem; in words, every word has a world of its own, supplier development is a very vast topic; as vast as it is its practices are also completely different in different regions even organisations in the same region practice it differently.

Authors point is to benchmark these two approaches to supplier development; the approach used in Japanese is much more Human oriented and they develop assets in the form of Humans not processes, they transfer knowledge, they spend time and in return they develop a financially sound partnership which is profitable for both supplier and customer; to strengthen the supplier-customer bond the system developed in these organisations is a informal organisational structure, which is referred to as an organic structure, this is very rewarding because many of the communication problems are solved just by being face to face with the managers communicating ideas and problems. The Japanese approach is much more effective and constantly consistent over the years since it has been established and developed. However, the Western Approach has been innovative and thought provoking and has been developed over the years through constant troubleshooting and experience. Over the years the process of supplier development has been evolving; the struggle of being the best has been exercised and emphasised by the Western OEM’s in this case BMW.

The Japanese approach was so simple and implemented with a regular pattern of calculated exercises which are effective but lack the plans if things backfire, if there are problems like the ongoing recession for example In a meeting of the author with Gary Brown, the G.M of Brose a 1st Tier supplier to Toyota and Jaguar told that the problem they are facing right now is that the electronic ordering system of Toyota and their self had been integrated and the order was coming to them according to the demand they had everyday but suddenly due to recession the demand changed and their system was not capable enough or programmed in the manner to cope with this kind of problem so Toyota had to cut off the live connection they had with Brose in order to review their end of the problem, but Jaguar did not have that kind of problem because they use entirely different method to forecast, order and analyse demand. (Brown 2009).The western approach is more subtle in most cases where they developed and improved continuously, and Japanese approach is a better way to approach this process but it has been quite constant and the same with all the suppliers, it was never changed or made flexible.

Another point that why Western Approach is more different then Japanese is because Western OEM approach has always been the development of the product up to a world class standard so that everyone might watch that in ‘shock and awe’, experience it with absolute bliss, so they developed such processes where they emphasised more on their product then on supplier development but the weak point was that most of them made expensive products which are mostly out of reach of consumer. Whereas, the success story of Japanese approach has been that it targeted most of the middle class consumer; which has been made quite clear that they wanted to develop suppliers with the potential; which have been developed and made world class suppliers.

Hence in Western approach the self-reliance strategy and strategy of supplier development is stretched over a long period of time but it is more fruitful in the end whereas the Japanese approach is implemented quickly and more fruitful in the beginning until the end.

Chapter 4
Suppliers Perspective
4.1 Introduction to DELPHI:

From DELPHI website ( , 03-04-2009) “Delphi is a leading global supplier of mobile electronics and transportation systems, including power train, safety, steering, thermal, and controls & security systems, electrical/electronic architecture, and in-car entertainment technologies. Engineered to meet and exceed the rigorous standards of the automotive industry, Delphi technology is also found in computing, communications, consumer accessories, energy and medical applications. Area’s in which DELPHI has expertise’s are:

* Controls & Security

* Electrical/Electronic Architecture

* Entertainment & Communication

* Fuel Cells

* Microelectronics

* Power train Systems

* Safety

* Thermal

* Hybrid & Electric Vehicle Products

* Sensors

4.1.1 DELPHI philosophy:

According to DELPHI philosophy ( , 03-04-2009) “All of our global customers can be assured that we will continue to meet their quality, scheduling, delivery and production needs in a timely manner. Our customers should expect to receive the same superior engineering for which Delphi is known. Delphi’s Absolutes of Excellence describe the attitude we need and expect from all of our employees and business partners.

* Focus: Your customer. Our customers are the focus of each job and all business processes. Do we pass this test all of the time? If we don’t, the job or process is waste. Pay attention to customer focus now and in the future.

* Performance goal: Do it right the first time, every time. Our goal is to do it right the first time, every time. We all know it is our goal for others, what about our expectations for ourselves? If you expect nothing less than the best, remember so does the customer.

* Method: Innovation and continuous improvement. This is part of Delphi’s culture and is expected by our customers. What can you do to seek and embrace change?

* Control: Customer Feedback. Customer feedback controls the entire process. If the customer says we are doing poorly, then we are. How do you accept customer feedback? Once we accept feedback, the process will get easier.

* People: Caring. We must care about our customers, jobs, business, and each other. What do you care about? Excellence is not mechanical. It is really within us.

* Style: Teamwork. Working together eliminates the idea of an "internal customer," a concept that can deflect the focus of the real customer. Are you a team player?

* Reward: Recognition and security. Having enthused customers means job security. Having dissatisfied customers puts us all at risk, remember that. What must we do? We must recognize and celebrate excellence. Our customers will recognize our excellence.

4.1.2 DELPHI approaches and strategies:

DELPHI has following important approaches ( , 03-04-2009) “ Principles Everyday, Delphi employees follow this set of principles in their work.

* Customer enthusiasm. Our customers’ interests always come first. We are committed to products, services, business practices, and an attitude that creates customer enthusiasm. This is the foundation of our market security.

* Trust in relationships. We expect our people to build and maintain a foundation of trust and respect in everything they do.

* Integrity. We are dedicated to complying with the letter and spirit of the laws, regulations, and ethical principles that govern us. We will protect all confidential information we receive from our customers or business partners.

* Responsibility to society. We hold ourselves accountable to the highest standards of conduct relative to our broadest corporate responsibilities to society as a whole. We will strive to build and maintain effective relationships with the communities and institutions with which we interact.

· Dedication to excellence. We are determined to achieve excellence in everything we do. Our future success depends on uncompromising adherence to our vision and the absolutes of excellence.

Challenge your imagination.

Through innovation, dedication, and commitment to the customer, Delphi has established a reputation as the world’s premier automotive supplier. As we move into new markets and expand our horizons, maintaining-and enhancing-that reputation is something every one of our employees takes personally.


Working in small teams, Delphi employees develop solutions vital to our customers’ success in an ever-changing market.


Above all else, Delphi values the health and safety of its employees. We make every effort to ensure our employees have a safe, clean environment where they can do their jobs efficiently. But Delphi also views safety as a "product" we provide our customers.

4.1.3 DELPHI capabilities:

From Delphi website ( , 03-04-2009) “With more than a century of successful collaborations with OEMs worldwide, Delphi has developed or adopted best practices and principles that add value to every stage of your project. Product-focused engineering teams are experienced in a variety of disciplines, including electrical, mechanical, and test systems software.

Relevant capabilities:

* Advanced product design and manufacturability analysis

* Design completion services

* Document development and control

* Process development and validation

* Lean manufacturing

* Short time to market

* Integrated management systems

* Total quality systems — design and test verification

* Continuous improvement

* Use of critical metrics

* Collaborating for competitiveness

* Manufacturing product compliance (UL, CSA, ETL, TUV, CE, QSR)

* Life cycle database management

Put Delphi’s capabilities and global resources to work for you.”

4.2 Introduction to BOELLHOFF:

According to BOELLHOFF websites ( , 02-04-2009) “BOELLHOFF a family run enterprise – an international group specializing in fastening and assembly technology a strategic partner for the innovative enterprise.

BOELLHOFF is a customer-oriented group divided into three business areas each offering a complete one-stop service for a particular area of technical expertise. Our team of specialists is available around the clock to provide technical support and expert advice on-site. Areas of expertise are:

* Fastening and Assembly Technology

* Fastener Service Provider

* Systems Technology

4.2.1 BOELLHOFF philosophy:

The BOELLHOFF commitment is to help customers optimize their value-added chain. For that BOELLHOFF has 10 reasons to explain which are ( , 02-04-2009):

* Total cost optimization: The focus of our attention is the customer’s value added chain. BOELLHOFF helps its customers to improve the performance and efficiency of their products and services.

* Expertise throughout all sectors of industry: Our solutions for industry are genuinely made-to-measure. Daily, BOELLHOFF faces a wide range of challenges in the technical, quality and logistics fields..

* Local expertise: To be close to all our customers requires a global presence.
Our global network of subsidiaries and production facilities provides comprehensive customer support world-wide. We think globally and act locally.

* Broad product range: BOELLHOFF grows with its customers. The focus of development is based on capable processes, which results in lower processing and assembling costs.

* Service solutions: Fast, lean, flexible and efficient processes are the key to success in modern manufacturing and logistics. Optimized material flows and assembly solutions.

* A zero defect philosophy: Our aim as a manufacturer is zero defects. Not just for safety critical used in the aerospace industry. Our commitment to zero defects goes across the board. We use advanced precision engineering technology and the very latest test equipment to guarantee constant, improving quality. We are certificated according to the latest quality standards includingISO-TS 16949.

* Our mission statement: BOELLHOFF’s mission is to become the customer’s supplier of choice. Enthusiastic employees committed to our corporate mission create success – today, tomorrow and into the future.

4.2.2 BOELLHOFF approaches and strategies:

From BOELLHOFF ( , 02-04-2009) “Courage, fairness and loyalty have been the cornerstones of our company culture for four generations. Our success has benefited our customers, our business partners and our employees.

Highly satisfied customers is our aim, all our efforts are directed towards customer satisfaction. Innovative thinking and acting. A rapid, reliable response. A friendly, business like approach. All designed to give customers exactly what they want.

Continuous improvement: Group companies are certificated to the highest international standards – proof of our commitment to ca policy of continuous improvement and to becoming a zero defect organization. We aim to achieve the highest quality standards set by our customers.

Growth is needed to stay competitive on the global market of tomorrow. Growth means innovative products on developed markets and the successful marketing of our tried-and-test products and services on new markets world-wide.

Market leadership: Our challenge is to become one of the market leaders for everything to do with fastening technology. Our position as a market leader is based on innovation, cost leadership and the ability to generate long-term returns.

Profitability: For a forward-looking family business, a sustained return on investment is a must for customers, employees and business partners. We strive to achieve new levels of return on capital and turnover in line with market conditions.

4.2.3 BOELLHOFF capabilities:

According to BOELLHOFF they have following core capabilities ( , 02-04-2009): “


"We think about tomorrow, today" (Annette Löwen, Marketing Manager, Automotive)

Innovative thinking is basic to all branches of our enterprise. Our primary goal is creating customer advantage through our innovative range of products and services.


"You will find us wherever anyone is fastening, riveting and joining." (Johann Haig-Linden, Product Manager, RIVKLE®) Rapid response requires closeness to the customer. You need a global presence to stay close to your customers. Our network of companies across the world gives us the local presence needed to serve our customers quickly and efficiently.


"A smile never made anyone poor." (Dr. Wolfgang W. Böllhoff, Chairman of the board)

We are a service enterprise. A service oriented approach governs all our dealings with customers and business partners


"I make no compromises on quality. Uncompromising precision is our business." (Monika Buschinski, Quality Control Department) Quality and service are two business factors which can be measured. Our quality management systems are audited and certificated according to a wide range of international standards. We have, for example, certification to ISO/TS 16949 – the automotive industry’s highest standard world-wide.

4.3 Introduction of BROSE:

From BROSE website ( , 02-04-2009) “We are partner to the international automobile industry and deliver our mechatronic systems and electric drives to more than 40 automakers as well as suppliers. Approximately 14,300 employees work for Brose at 52 locations in 21 countries on all major automotive markets worldwide. BROSE has expertises in following fields of auto motives:

* Technology for doors

* Technology for seats

* Electrical drives and motors

4.3.1 BROSE philosophy:

According to BROSE websites (, 02-04-2009) “Since motorists cannot see our products, but rather “merely” experience them in the use of doors, windows, lift gates, seats, seatbelts, sunroofs, etc., Brose decided to design the “Brose brand” via all visible elements of the company. The design is sophisticated in form and absolutely consistent throughout the corporation.

These elements include:

* the design, facades and colors of all factory and office buildings

* the design and interior design of all production and office spaces

* all foyers and conference rooms

* social facilities for dining, health and fitness

* all company vehicles, including all employee leased cars worldwide

* company and sports clothing

* all printed materials and media

4.3.2 BROSE approaches and strategies:

According BROSE website ( , 02-04-2009), BROSE has followings approaches and strategies: “

Market Leadership:
To be the worldwide market and technological leader in intelligent adjuster systems for vehicles.

To increase our business volume by at least 10 percent per annum to strengthen our competitive position even further.

To achieve a five percent profit margin in order to finance our growth and secure our independence.

To satisfy our customers by providing products and processes driven by innovation, cost awareness and quality.

To streamline all decisions and activities enabling prompt and correct implementation

Our managers communicate actively, provide constructive criticism and are open to criticism themselves. They are equally frank when addressing unpleasant issues.

4.3.3 BROSE capabilities:

BROSE has following capabilities, which make’s BROSE cream of the crop in automotives suppliers industry ( , 02-04-2009): “

Tradition and openness to change:
As an independent family-owned company based on 100 years of tradition, our actions are characterized by long-term orientation as well as the will to actively bring about necessary change.

Internationality and regional commitment:
As an internationally oriented company, we are aware of our responsibility and the cultural diversity at all our locations, with the focus on partnership and social awareness.

Success orientation and willingness to perform:
We aim to be among the best and not to become complacent with what we have accomplished. This can be seen in every single employee’s willingness to perform.

Commitment and responsibility:
Working in conjunction with business associates and within the company, we are reliable partners, we assume responsibility for our actions and abide by our agreements.

Reliability and honesty:
We encourage a climate of openness and trust. In our relations with business partners and employees, we naturally respect each person’s dignity.

Willingness to learn:
Our employees are constantly developing their skills. They respond positively to new tasks and change.

4.2 Do suppliers prefer one company approach over other?

Yes! Suppliers prefer the approaches of one customer over other customer.

Factors that affect supplier’s relationships, approaches and strategies towards their customer are most likely:

* Supplier trust of the OEM

* OEM open and honest communication with suppliers

* OEM providing timely information to suppliers

* Degree of help the OEM provides the supplier to reduce costs and improve quality

* Level of excessive and late engineering changes by OEMs

* Supplier involvement in the OEM’s product development process

* Whether an OEM gives the supplier opportunity to recover sunk costs on cancelled or delayed programs

· Suppliers’ perceived ability to make an acceptable return over the long term on the OEM’s business

4.4.1 PPI survey on North America Automotive 1st Tier Suppliers:

A survey known as Working Relation Index (WRI) was conduct by Planning Perspective Inc (PPI) on 284 1st Tier Suppliers of North America Automotive OEMs (Ford, GM, DaimlerChrysler, Honda, Toyota and Nissan) in 2008. The focus of the survey is on working relationships of suppliers with their customers. The survey enlighten that Toyota is the top choice by the suppliers of North America.

Here are some important tables from the survey that reveals the concepts and approaches of suppliers towards their customers. From PPI websites ( , 05-04-2009)“

The Working Relations Index (WRI) ranks OEMs’ supplier working relations based on 17 criteria across five (5) areas:

* OEM Supplier Relationship

* OEM Communication

* OEM Help

* OEM Hindrance

* Supplier Profit Opportunity

WRI scores can range from zero to 500, with 500 indicating the best supplier relations. A WRI ranking of zero to 249 indicates very poor to poor supplier working relations; 250-349 indicates adequate relations; and 350-500 indicates good to very good supplier working relations.

Discusses 4 major areas which help OEMs to earn more profit and benefit by developing their suppliers, those 4 areas has been ranked by suppliers by giving them points out of 4.0 with respective to each OEM. Factors that are focus of discussion in this table are:

* Sharing of New Technologies

* Invest in New Technologies

* Trust of OEM on suppliers

* Preferred Customer

Benefit to OEMs and suppliers development cited from

Table 2 explains four critical areas that directly impact suppliers financial viability – OEM concern for supplier profit margins, suppliers’ perceived ability to make a fair profit, OEM fairness in allocating charge-backs, and supplier ability to recover material costs.

Financial Impact cited from”

So this survey by PPI clearly indicates that suppliers do change their approaches and strategies from one customer over another customer. For an instance Chrysler was ranked No 1 by its North American suppliers fifteen years ago in 1993 by PPI survey, but in 2008 PPI survey Chrysler is in last place of table.

4.4.2 Automotive Europe Congress Survey on OEM-Supplier Relation

A survey by Automotive News Europe Congress was conducted on suppliers of Europe Automotive industry, which clearly indicate that suppliers do suffer from OEMs strategies and suppliers do prefer the approach of customer over another. Reference to that survey can be available in soft format of this document.

Chapter 5

Successes of OEMs in Supply Chain Management
5.1 Boeing Commercial Airplanes Group

From website ( , 27-03-2009) “Boeing Commercial Airplanes Group, BCAG, is a firm that demonstrates excellence in the area of supplier evaluation. It has a total of 3,100 suppliers. BCAG has put great emphasis on supplier evaluation since half of their total production costs come from suppliers. They have realized that suppliers are integral to the success of their business and established high-level supplier evaluation methodology to decrease their costs, improve their quality and introduce new technologies.

Each supplier has to be certified to become a BCAG supplier. Boeing has a "preferred supplier certification" process where suppliers are evaluated and rated against specific standards in the implementation of statistical process control, business processes and performance. Once they become a supplier, they are regularly given report cards and rated on a gold, silver or bronze status for meeting Boeing’s expectations.

Russ Bunio, vice president and general manager of supply management and procurement for (BCAG), says that suppliers who meet or exceed company standards are identified and recognized as preferred suppliers. In turn, they are rewarded by benefits such as selection preference, reduced inspections, industry recognition, and additional business opportunities. Only the very best are recognized publicly for their efforts and only a few suppliers can make it. The best suppliers deliver products of flawless quality and maintain a perfect on-time delivery schedule, consistently introduce new technology, provide Boeing with continual cost reductions, work as an extension of BCAG’s business and production systems, and focus on teamwork, risk sharing, continuous improvements and win-win attitudes.

Boeing has established a continuous cost-improvement program, CCIP, which is designed to achieve 3%-5% annual reductions in what BCAG pays for materials and parts. This target could not be achieved if BCAG did not evaluate its suppliers on a continuous basis and reward the best practices. The highest level of recognition is to be chosen as the “supplier of the year" which has a motivational intent. Of the Seattle-based company’s 3,100 suppliers in 1999, only 116 were recognized for meeting or exceeding continuous cost-improvement goals and just 13 were given "supplier of the year" recognition. Boeing then uses a small fraction of the suppliers of the year as benchmarks against the other suppliers. Only 0.5% of BCAG’s suppliers were chosen recently as the hallmarks against which other suppliers are measured.

5.2 Lotus Cars Ltd

From Supply Chain Groups ( , 26-03-2009) “Building on internal cost-reduction initiatives and a supplier rationalization process, Norwich-based Lotus Cars established a two-year Supply Chain Groups project in January 2004, whose focus on improved scheduling and communications has resulted in a 50% improvement in delivery performance for issues attributable to supplier failure.

The Challenge

Lotus designs and produces lightweight sports cars for the global market, working with 200 suppliers who provide over 2,800 parts. A shift in emphasis from building purely Lotus products to manufacturing for other marquees combined with predicted sales growth and customers’ increasing demands for individuality had highlighted the need for a robust, fully-integrated supply chain capable of delivering a reliable, flexible and lean service.

Having identified the potential gain to be achieved by addressing issues relating to its schedule and the ability of key suppliers to support its requirements the Supply Chain Groups programmed was seen as the optimum approach for fast tracking improvement initiatives.

Dan Parnell, Material Control Manager and Project Champion at Lotus: ‘Production Schedules were not an accurate reflection of material demand and were not synchronized to bin demand – as a result, a number of suppliers were presenting us with delivery shortages. Through the Supply Chain Groups project we wanted to improve scheduling to give suppliers a very clear demand profile so that we could reduce these shortages and also tackle the problem of obsolescence.’

The Solution

Lotus worked with facilitators from Momentum Partnership and a group of nine strategic suppliers with the greatest scheduling complexity on a range of activities designed to improve the management of information, purchasing and logistics performance.

* The Industry Forum Partnership Tool was used to facilitate structured discussions with suppliers to reveal the reasons for under-performance and to identify targets for improvement.

* Value Stream Mapping was employed to understand, simplify and restructure the value stream to enable the production process to respond more efficiently to customer demand through, for example, late configuration.

* By applying best practice and working closely with suppliers to understand their needs and constraints, Lotus developed new processes for the creation and dissemination of schedules.

* Supplier development activities, involving workshops with trained change agents, were designed primarily to reduce obsolescence, simplify component variety and resolve individual supplier issues relating to improving lead times, supply routes and workplace organization.


* Delivery Schedule Adherence has improved by 10% to 94% as a direct result of working to schedules that are aligned with build activity and take account of supplier production processes, implementing a Bin Tracking System (returns) and simplifying component variety.

* Production line shortages have reduced by 50% over the period of the project, with accurate scheduling and regular communication giving suppliers better visibility of demand and enhancing production process stability – and also enabling suppliers to offer competitive prices on smaller batches.

* The closer alignment of supply to demand has enabled Lotus and the Supply Base to remove excessive safety stock which has been put in place to counteract the level of historical inaccuracy within the production schedules. This has contributed to an overall reduction in inventory from £7.5 million to £5 million over the last four years. This equates to 20 stock turns per year.

* Improved communication with regard to project run outs has helped to reduce the cost of obsolescence from £150,000 per run out program before the project to £3,000 at the end of the project (s shown are for the whole supply base).

* Significantly improved cross-functional co-ordination and communications and regular QCD reports on each supplier are helping to integrate the supply chain with internal operations, embed best practice and enable continuous improvement.

Dan Parnell: ‘Without the Supply Chain Groups project and the support and expertise of the facilitator it would have taken us much longer to undertake this work and achieve these results.’ ”

5.3 Cummins

From Supply Chain Groups ( , 26-03-2009) “Having improved its internal plant logistics, Darlington-based diesel engine manufacturer Cummins embarked on the next logical step, a two-year Supply Chain Groups project which has provided the structure and delivered the improvements needed to drive logistics capabilities up and costs down.

The Challenge

Cummins is the world’s largest manufacturer of diesel engines, for customers such as DAF, Nissan, Dennis and VDL Bus International. Cummins in Darlington produces around 55,000 engines a year and generates an annual income of around £250 million. When benchmarking indicated that a 50% improvement in material handling productivity was achievable by addressing key objectives, the company initiated a Supply Chain Groups project tailored to achieve those objectives.

Mike Peacock, Supplier Development Executive and Project Champion at Cummins: ‘Darlington is an assembly plant and 80% of our manufacturing costs are outside our direct control. Our improvement goals were clearly best served by focusing on our suppliers. We had very low incoming delivery performance – less than 40%. Parts for our assembly lines weren’t arriving on time and when they did arrive there was a lot of low-tech, non-value added activity related to their receipt.’

The Solution

The Supply Chain Groups project, which was facilitated by SMMT Industry Forum, involved eight suppliers and Cummins’ own specialists in materials, supplier development, packaging, finance and IT. Assessments, hands-on training and individual supplier development activities encompassing interventions such as SMED, 5S, TPM and Kaizen, were undertaken to improve delivery performance in general and packaging standardization, goods handling procedures and electronic communications in particular.

* Partnership assessments covering all aspects of the relationship between Cummins and its suppliers were carried out to identify performance and communication gaps and, following actions to close these, to measure improvements.

* Change Agents from supplier companies were involved in workshops and five weeks of training covering project objectives, the tools and techniques to be employed and the quality and delivery performance data to be gathered and analyzed.

* Individual improvement projects were selected and initiated by the change agents in their own companies.

* The project has introduced Value Stream Mapping as an important tool, enabling management teams to identify opportunities for continuous improvement in capacity, inventory and line-side stock control, and quality.


* Delivery performance has increased from less than 20% to 76% on-time in-full for this group of suppliers (average performance of all suppliers to Cummins in Darlington is 58%).

* With improvements in EDI, ‘dispatch advice compliance’ has increased from 12% to more than 80%.

* This group of suppliers is now 100% compliant on bar-code labeling.

* Individual suppliers have made a number of achievements:

o Up to 50% reduction in set-up times (e.g. from 3 hours to 1.5 hours)

o OEE increased by up to 27%

o 100% increase in value-added per person

o Stock turns up by 16%

o 37% increase in people productivity (parts per man hour)

o Floor-space utilization up by 75%

o The logistics provider has seen a 17% reduction in ‘box pick time’

* Cummins is confident that the framework and goodwill established by the project will enable it to continue to work with this group of suppliers to identify more opportunities to reduce costs.

* At the final meeting of the steering group, these suppliers were invited to participate in a program of Six Sigma training and quality improvement projects, led by Cummins’ internal experts.

Mike Peacock: ‘The Supply Chain Groups project has given us a proven process to develop effective change agents, launch improvement activities and ensure new learning is being applied in the right way.’

Chapter 6

Failures of OEMs in Supply Chain Management

From Supply Chain Digest ( , 29-03-2009) following are few examples of disasters in different OEMs causes by implementation of Supply Chain infrastructure in their respective companies. “

6.1 GM’s Robot Mania

General Motor’s CEO in the 1980s was Roger Smith, of “Roger and Me” fame, the documentary that really launched the career of liberal filmmaker Michael Moore. Smith was fascinated with technology.

Among other projects, such as the purchase of IT firm EDS, Smith embarked on a very aggressive effort to implement robots in GM factories. When Smith was appointed, GM had approximately 300 robots of one kind of another. He soon created a joint venture with Japan’s robot designer Fujitsu-Fanuc, and said he planned to deploy 14,000 new robots in GM plants by 1990.

Bad move.

Costing billions of dollars, the robots never really worked. As one observer wrote, “The robots accidentally painted themselves and dropped windshields on to front seats.”

A “show place” factory in Hamtramck, MI turned out to be more like a “basket case.” Introduction of the robots lowered productivity. A nearby Mazda plant produced just as many vehicles, with 1,500 fewer employees. The entire project was later largely scrapped, as GM’s costs rose and market share shrunk. Meanwhile, Toyota delivered low cost, high quality vehicles using comparatively low tech “lean production” techniques.

As one GM finance executive later noted, at the time the company could have bought both Toyota and Nissan for the money invested in the failed robot technology, a point especially painful given GM’s troubles and Toyota and Nissan’s success today.

6.2 Cisco’s Inventory Disaster

Cisco rode the technology wave of the 1990s to incredible growth, profits, stock valuation, and prominence for itself and CEO John Chambers as global business giants.

As the tech bubble burst, however, Cisco was slow to see the slowing demand, and had inventory system and visibility issues that left it caught it unprepared when its market tanked. As a result, it had way more routers, switches and other gear than it needed.

How much more? In May, 2001, the company announced it was taking a $2.2 billion (that’s with a ‘b’) inventory write down, probably the largest in history.

"The networking industry, having no experience with a downturn and never having to deal with double or triple ordering, responded to high order patterns with higher build rates and substantial inventory accumulation to facilitate the projected shipping rates," said one analyst.

In one fell swoop, the “Cisco bubble” also burst, with the company being wildly pilloried in the business press, and the stock price being cut in half. It has really stayed close that price level ever since.

6.3 Apple Misses Power Mac Demand

Many forget than even through the mid-1990s, Apple was often the leader in market share in the then still deeply fragmented PC market. That position took a permanent hit in the last half of 1995 due to supply chain foibles.

Apple was introducing its new line of Power Mac PCs, to be launched just before the Christmas season in 1995. Just two years before, however, the company had been burned by excess inventories and production capacity during a similar launch for its Power Book laptops. So this time, it played things very conservatively. That turned out to be the expensive option.

When demand for Power Macs exploded, Apple was caught short for the critical Christmas season. Forecasts were too low, there wasn’t enough flex in the supply chain, and some parts suppliers developed additional delivery issues. At one point, Apple has $1 billion dollars in unfilled orders in its system. Unable to capitalize on the market opportunity it had been handed, the stock price was soon cut in half, the CEO was shown the door, shareholder lawsuits came pouring in, and Apple’s market position in PCs took a permanent hit such that it took the IPOD years later to lead a recovery in the company.

6.4 Adidas Warehouse Meltdown

Starting in 1993, athletic shoe and gear maker Adidas tried to implement first one and then a second warehouse management system in its Spartanburg, SC, distribution center.

The troubles were caused in part by Adidas insisting the vendor’s Unix-based system be ported to fault tolerant Stratus computers. They couldn’t make it work, and eventually the company (Integrated Software Logistics Engineering) went belly-up in mid-project.

Another WMS vendor, perhaps unwisely, then tried to implement their system. The DC also featured heavy automation, requiring extensive logic and integration in the WMS. Perhaps frustrated by the long project delays, Adidas then went live before the system was really ready.

The system just didn’t work, and Adidas was unable to process and ship orders. Estimates were than in January, 1996, the company in total was only able to fill 20% of its $50 million in North American orders, and much of that came from overseas plants shipping direct. It took many months to get the system up to full speed.

As a result, Adidas suffered major market share losses that persisted for a long while, while IT and logistics staff left the company in droves. As a cautionary note to the media, Modern Materials Handling magazine had named the Spartanburg DC its “Warehouse of the Month” in late 1995 – before the facility even went live.

Chapter 7
Recommendation & Future Trends in Supplier Development

Supplier Development has been evolving since its beginning and it will keep evolving and for the present its future seems quite bright. There are certain things which need to be changed. First of all the OEM’s who have not yet considered changing their organizational structures need some revolutionary reforms in their organizational structure, because one thing which is the most important lesson of all is the communication between supplier and OEM this problem can be eliminated just by revising the structure of the organization. Another problem which occurs during this process is that how the supplier should believe that you are here to help? This problem as discussed during meeting with Mr. Gary Brown led to the conclusion that whenever you are trying to convince some supplier to take up their supplier development program and that supplier does not trust you in any way you have tried then only change of management might help you establish that relation of development with that supplier. (Brown 2009)

Future Trends:

The future trends noticed in OEM’s are very much similar because the world is becoming smaller day by day and the heaviest growth in suppliers is up to an estimate of 80% only in Asia; so the OEM’s and suppliers need to establish a network where they are in contact all the time where rigorous planning, forecasting should take place and known to all. All of these things are possible now with the breakthroughs in this century with the information systems. Communication which is the most important part of supplier development can be implemented very easily now; for example BMW’s supplier evaluation system which automatically observes the suppliers performance based on some calculations on some attributes and produces a report. This is an innovation on BMW’s part that they have covered the gap.

Another trend which should emerge is the concept of a global collaboration of suppliers in which the suppliers from the globe should be coming close to each other and sharing their processes, experiences and developing other suppliers who are not up to their standard because in this manner the world will truly be a global village, this can be the future of the supply base of an OEM and the next step that when that OEM plans to move in that region it would not be having that much of a trouble establishing a supply base from scratch and it can find suppliers already working there. This practice can be regional and global keeping in view the effective cost of logistics, processes and quality.


From all the study that has been done by authors it is concluded that Supplier Development is not plain mathematics which can be implemented by the help of certain set of rules but it is simple common sense; the only tool needed for this process and processes can be changed or modified if one plan fails, there are sometimes some flaws in the process and the best way to eliminate those flaws is to fully assist the supplier to understand, commit, undertake, implement and maintain the process and the most important part of this process is communication a small gap in communication can do collateral damage and a small leap in it can create wonders.

Supplier development is a process which can identify the loopholes in OEM and Suppliers methods, processes and their implementation.

To convince the supplier is the hardest part of them all, especially the ones who do not have an attitude towards evolutionary reforms which can turn the organisation upside down. To overcome this fear of risk, it is important that first of all supplier understands the proper Risk Assessment Process.

Hence, this process depends 60%-70% on suppliers will and potential and the rest of the percentage on the OEM which is willing to develop their suppliers.

List of References

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Brown, G. ,(2009), What is it like to be a world class supplier, [Interview by A.Mirza], Coventry, 12th March 2009

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DELPHI (c2009), [online] available from [03-April-2009]

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knowledge-sharing network: the Toyota case”, Strategic Management Journal, Vol. 21 (3), pp. 345-67.

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Handfield, Robert (2006), Supply Market Intelligence, Auerbach Publications, USA

Handfield R., Krause, D., Scannell, T.,Monczka, R,(2008), ‘Avoid the Pitfalls in Supplier Development.’, In Supply Chains and Total Product Systems: A Reader ed Rhodes, E. Warren, J. Carter, R.

Handfield, Robert B. (2006), Supply Market Intelligence, page 424

Appendix-B, Auerbach Publications

Handfield R., Krause, D., Scannell, T.,Monczka, R,(2000), ‘Avoid the Pitfalls in Supplier Development.’, Sloan Management Review 41, (2) pp 37-49

Hines, P. (1994), Creating World Class Suppliers: Unlocking Mutual Competitive Advantage, Pitman Publishing, London.

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Lamming, R.C. (1993), Beyond Partnership: Strategies for Innovation and Lean Supply, Prentice-Hall International, Hemel Hempstead.

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The United Nations Industrial Development Organization (c2009), [online] available from [25-Mar-2009]

Watts, C.A. and Hahn, C.K. (1993), “Supplier development programs: an empirical analysis”, International Journal of Purchasing and Materials Management, Vol. 29 No. 2, pp. 10-17.

Weber, Julian (2009), Design Collaboration Between OEMs and Electronics Suppliers, [Online] available from [12-03-2008]

Womack, J., Jones, D. and Roos, D. (1990), The Machine that Changed the World, Rawson Associates, New York, NY.

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Appendix A

Case Study of John Deere & Co. Supplier Development Program

From United Nations Industrial Development Organization website ( , 25-03-09) “


Deere&Company, founded in 1837 (collectively called JohnDeere), has grown from a one-man blacksmith shop into a corporation that today does business around the world and employs approximately 56,000 people. The company continues to be guided, as it has been since its beginning, by the core values exhibited by its founder: integrity, quality, commitment and innovation. JohnDeere consists of four major business segments

* agricultural equipment

* commercial & consumer equipment

* construction & forestry

* credit

Those segments, along with the support operations of parts and power systems, are focused on helping customers be more productive as they help to improve the quality of life for people around the world.

Need for Supplier Development:

As customer expectations rise, companies come under increased pressure to deliver products to market faster, with more features, higher feature mixes, and lower cost. The ability of a company to respond quickly to market changes and customer demands is a competitive advantage. As the percentage of purchased material increases, the supply chain becomes the dominant factor in determining market response. Suppliers determine a large share of the cost of the product. As more and more components are out-sourced, the majority of costs can be built into a product before the company selling it starts building it. Traditional manufacturing techniques have difficulty handling low-volume, high-mix production, and additional costs are incurred all along the supply chain as many firms deal with these challenges through inventory pools. The time it takes to fill an order is in many cases the difference between dominating the market or running in the back of the pack. Supplier lead times sometimes impose critical limits on a firm’s responsiveness to customer demands. When the first tier suppliers have to wait for their suppliers, the summation of all supply chain lead times can frustrate the best marketing plans. Clearly the company that s out a way to influence the entire cost structure (internal and supply base) will have a cost advantage. If that firm can also develop the means to cope with production fluctuations, lead times issues and product mix challenges, it will be a formidable competitor in its industry.

Meeting the Need:

In the mid-1990s, Deere & Company used the assessment criteria from the Malcolm Baldrige Quality Award to evaluate areas of the business. Part of the plan, which emerged from this exercise, was a renewed emphasis on Supply Management. The leadership group determined that it would be difficult-to-impossible to compete globally if supply base costs were not brought under closer control. To this end, they authorized the formation of Supplier Development groups throughout the enterprise.

Supplier Development is comprised of engineers with a broad range of experience in various aspects of manufacturing. The typical Supplier Development engineer has a graduate degree in a field of engineering combined with real-world experience. They combine the latest theories with a healthy dose of reality. To this prerequisite base, Deere added extensive training in specific techniques essential to leading change within a company. Facilitation skills are emphasized. The result is a group of motivated, highly trained and experienced change agents. Supplier Development engineers work with supply management’s Strategic Sourcing group to select Supplier Development project candidates. Working in teams, the Supplier Development and Strategic Sourcing personnel, together with other stakeholders, analyze the performance of various suppliers to determine where opportunities exist for improvement. Some of the selection criteria which a supplier needs to meet to be chosen for Supplier Development activity include: the presence of a critical technology, intent for a long-term supply relationship, a genuine desire by the supplier to make improvements, and the usual factors of cost, quality and delivery. As there are far more suppliers than there are Supplier Development engineers, candidates for Supplier Development projects are chosen carefully with the goal in mind of maximizing the impact on overall business performance. Once candidates are selected, they are entered on a Supplier Development web-based project tracking system. This notifies all factories using that supplier so that they can contact the lead Supplier Development engineer working with Strategic Sourcing and determine enterprise performance goals that this supplier should meet. The supplier’s past performance, new performance goals, and potential new business are blended into a presentation that is given to the supplier by the Strategic Sourcing and Supplier Development team that visits the supplier. The team also takes an initial charter that is a non-binding, written agreement for everyone to cooperate if a project is identified, to share data, and how cost reductions will be shared. The Supplier Development program is explained to the supplier management team and they are asked to make their best people available for a process mapping exercise to determine potential projects. The supplier almost always agrees to process mapping their operation. Process mapping combined with an assessment identifies opportunities for projects. These are presented to the supplier management who normally selects a team to work the project. At this point another charter is created that is specific to the project. This charter names the people, the start and expected completion date, meeting frequency, percent of time assigned to the project, the goal results, and anything else that is needed to exactly define the project scope.

Following their selection, a supplier is introduced to Supplier Development by the supply management specialist working with that supplier. The Supplier Development engineer then assumes responsibility for the next phase of the supplier development relationship. In an initial visit, the business and manufacturing processes are evaluated, and opportunities are identified for joint effort involving the supplier and the Deere Supplier Development engineer, who may be assisted by other Supplier Development resources as needed. A starting project is selected and a charter is written which details the scope of the project to be undertaken, the expected benefits, roles and responsibilities, deliverables, and management commitment. A team of resources from the supplier is identified to work on the project in conjunction with the Supplier Development engineer.

Using the charter as a project guide, the Supplier Development engineer trains supplier personnel as necessary in the techniques of problem solving which will be employed. A fairly basic tool used early in the project is process or value-stream mapping. The mapping exercise helps to focus the project team on where the challenges lie, and the training helps the team think of original solutions. The process also trains supplier personnel in the use of advanced problem solving tools, so that they are able to use this approach in the future without the involvement of Deere Supplier Development resources.

After results are achieved from the project, the supplier and Deere supply management agree on the impact of the project. If, for example, it used to cost the supplier $900,000 to produce a product which Deere would buy for $1,000,000, they would have a profit of $100,000, or 10%. If working together, the supplier and Deere Supplier Development were able to reduce the cost of this product by $200,000, the new cost of production would be $700,000. By splitting the cost savings, Deere would then pay $900,000 for the material, while the supplier would realize a profit of $200,000. This is truly a “win-win” approach to supplier development.


Suppliers who have participated with Deere & Company in this effort have realized significant savings. They have been able to increase production capacity, reduce lead times, and improve their overall business performance. This creates a stronger supplier for Deere. Stronger, healthier suppliers cost less to work with and improve the bottom line performance for supply management. An important benefit from the supplier’s viewpoint is that the savings they realize from involvement in Supplier Development activities apply to all their production for all customers. Deere only asks for a share of the savings on production going to Deere. This increases further the profitability of the supplier.

Supplier Development success stories are published to demonstrate the type of results that can be expected from participation in this program Four typical projects are summarized in the next few paragraphs. Each of the following case studies comes from a different Deere division. Supplier Development is a common process across divisions, with Supplier Development resources taking an active role in all of Deere’s supply management groups

Supplier 1 Case Study

Supplier Development engineers from the Construction & Forestry Division worked with “Supplier A”, a supplier of sheet metal and plastic products, to reduce cost while improving quality and delivery performance. The end result was the identification of part families and the introduction of cellular manufacturing techniques. Annual savings realized by Deere were $354,000. Tangible benefits to the supplier, in addition to their portion of the cost savings, were:

* 40% reduction in cycle time, from 10 days to 6

* 40% reduction in inventory

* 75% reduction in rework costs

* 50% reduction in scrap

* 40% reduction in indirect labor

* 9% reduction in direct labor

Supplier 2 Case Study

The Commercial & Consumer Equipment Division worked with “Supplier B”, a supplier of exhaust components. In this project, field engineers from the Wisconsin Manufacturing Extension Partnership were also brought in as additional resources. The resulting projects were directed at reducing manufacturing cycle time. Annual savings realized by Deere were $455,000. Tangible benefits to the supplier, in addition to their portion of the cost savings, were:

* 50% reduction in manufacturing cycle time

* 70% reduction in assembly cycle time

* 82% reduction in rework operations

* 17% increase in average line rate

* 7.5% increase in production capacity

* 5.4% decrease in manufacturing cost

Supplier 3 Case Study

A Supplier Development team from the Agricultural Division worked with “Supplier C”, a supplier of transmission housings and related parts for agricultural tractors. The purpose of this project was to help the supplier meet cost targets for a transmission housing to be used in a new model of tractor. The new parts were similar to existing parts produced using a mature manufacturing process, and had been reviewed several times by design engineering for savings opportunities. It was believed that there was limited potential for improving the housing. The team identified major cost drivers and was successful in making significant improvements in the cost and manufacturability of the part. Annual savings realized by Deere on the transmission housings were $576,000, with an additional $10 per tractor in associated parts savings. Other tangible benefits realized from this project were:

* Simplified part design for manufacturability

* Eliminated two cores from foundry process

* Reduced casting weight from 891 pounds to 812 pounds

* 18.3% reduction in machining cycle time

* Combining two part numbers into one

Supplier 4 Case Study

Deere & Company Supplier Development engineers worked with “Supplier D”, a supplier of wire-form parts. The focus of this project was to increase the supplier’s flexibility and ability to respond quickly to customer orders. The action plan addressed three main areas: 1) capacity issues, 2) material flow and control, and 3) process variability. Annual savings realized by Deere from this project were $580,000. In addition to annual savings of $1,435,000, other tangible benefits to the supplier were:

* 78% reduction in manufacturing cycle time

* 71% reduction in quality PPM

* 42% improvement in on-time delivery

* 47% reduction in total inventory cost

* 23% reduction in floor space requirements

* Improved flexibility to meet changes in product volume and mix

* Increased sales to other customers as a result of these improvements

The Business Case

The above results, impressive as they are, are not the sole reason for developing a Supplier Development capability. Supplier Development is a tool that can be used by Strategic Sourcing to help in commercial negotiations. Supplier Development is a technical resource, which complements the commercial side of supply management. Where seemingly insurmountable technical problems are encountered, Supplier Development gives the buyer the ability to achieve corporate goals while improving the relationship with the supply base.

At the end of FY 2001, Deere had 92 Supplier Development engineers across the enterprise. These engineers had worked on a total of 426 projects, with $52,000,000 in cost savings and $36,000,000 in cost avoidance. Similar results were realized in quality, delivery, and lead time metrics. Relationships with the supply base have been strengthened, and suppliers have become more able to respond to changes in production schedules and requirements. This increased performance of the supply base constitutes a significant competitive advantage for Deere over our competitors. Another benefit to Deere from Supplier Development is the creation of a pool of talented problem solvers. The training of a Supplier Development engineer in modern lean and flexible manufacturing techniques, coupled with the experience they have in a variety of industries and situations, equip them well for positions throughout the organization. They are equivalent to “black belts” in the scope of their knowledge, and also possess a strong appreciation for the supplier and their relationship to Deere. This perspective puts them in a unique position to be able to integrate the supplier’s processes with Deere’s.

There is an initial investment when starting Supplier Development. Including training and travel with salary and other expenses, the annual cost of one Supplier Development engineer is in the neighborhood of $130,000-$150,000. The return on this investment is in the 3:1-8:1 range. Annual savings of $1,000,000 per Supplier Development engineer are not unusual, although the average is closer to $700,000. The job attracts talented people who appreciate a challenging assignment and are able to work with little supervision. These people have the skills to accept assignments of considerable responsibility at higher levels within the company.


If this is such a great idea, why doesn’t everyone do it? It would seem that benefits such as these would be enough to convince anyone of the wisdom of this course of action, but inertia and tradition are powerful forces. Some of the more common reasons identified include:

* “It’s the supplier’s job”.

* “We don’t have the manpower.”

* “Consultants can do it.”

* Win-lose mentality

* Unwillingness to share benefits

Each of these excuses are indicative of a resistance to change. Supplier Development, as practiced at Deere, is a radical departure from prior practice. It requires a willingness to face internal issues uncovered at the supplier. Deere has had to learn from suppliers and make changes in the way it relates to the supply base. This has been a painful and positive process of improvement and growth. The supply base has also been changing and growing. As they become more capable of responding quickly to the changing requirements of the customer, Deere has increased its ability to respond. Responsiveness and Flexibility are important keys to not only survive but prosper in the economic climate of the twenty-first century. If the excuses for not doing supplier development are familiar to you, ask yourself the question, “If my company doesn’t do Supplier Development, would I want my competitor doing it?””

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