Supplier development: customers as a catalyst of process change
Janet L. Hartley
Major corporations are using a “hands-on” approach to improve their suppliers’ manufacturing processes and administrative systems. Working side by side with their suppliers’ employees, customers are improving quality, reducing cycle times, cutting costs, and increasing capacity. The results of these efforts are impressive. A manager at General Motors, whose group has completed supplier development projects with more than 2,000 suppliers, cites average supplier productivity improvements of more than 50 percent, lead time reductions of up to 75 percent, and inventory reductions averaging 70 percent during their one-week workshops. On one project alone, Honda of America’s Best Practices (BP) team reduced a supplier’s costs by more than $200,000 per year by changing the layout of a welding process.
Formal activities undertaken by customers to improve the performance and capabilities of existing suppliers are referred to as supplier development. All of the major auto assemblers in the U.S. and some first-tier suppliers now have formal supplier development programs in place. For example, the Toyota Supplier Support Center in Lexington, Kentucky helps suppliers and other companies adopt lean manufacturing concepts. Ford has a team of “kaizen engineers” who are constantly on the road facilitating supplier improvements through one-week workshops.
Despite all these formal supplier development programs in place in U.S. firms, the dynamics of putting such a program into place have not been widely discussed in the literature. In this article, we describe how supplier development is implemented, address the problem of sustaining the change process once the customer leaves, and explore why supplier development improves suppliers’ performance. The process described is based on our interviews with managers at Honda of America, General Motors, Ford, Toyota, and Chrysler. All these companies have had formal supplier development programs in the U.S. since the early 1990s. To obtain the suppliers’ perspectives, we also interviewed managers and operating associates in eight supplier companies covering a range of automotive components, including metal stampings, plastic moldings, and electronics. These suppliers were the recipients of their customers’ development efforts; several have since launched their own supplier development programs. Although our study focuses on the auto industry, which has been a pioneer in supplier development, the findings have implications for firms in many industries.
WHY DEVELOP SUPPLIERS?
Supplier development is a relatively new phenomenon in the United States. Traditionally, most suppliers managed their manufacturing processes with little customer input as long as the product met customer specifications. Customers provided hands-on technical assistance only when suppliers had major problems with short-term quality or delivery performance. Then, during the 1980s, U.S. supplier management practices underwent a paradigm shift. Companies reduced the number of direct suppliers used and began evolving from adversarial relationships to more cooperative ones with the remaining suppliers. Under the new paradigm, suppliers were given long-term contracts (often for the life of a product model), making supplier development an attractive proposition for both types of firms.
There has also been a trend toward an increased level of outsourcing. Industrial customers depend more on their suppliers for their products’ end quality, performance, and cost than in the past. For example, 80 percent of the manufacturing cost of a Honda and 70 percent of the cost of a Chrysler automobile can be traced back to purchased components. So to ensure that end consumers receive the right product at the right price, industrial customers are actively intervening in their suppliers’ operations. By initiating supplier development programs, customers become a catalyst for change in those organizations.
Although the firms we visited also have groups devoted to improving supplier quality, cost reduction is the primary focus of the supplier development efforts described here. The major U.S. auto assemblers generally require their suppliers to provide “cost give-backs” of 2 percent or more annually. Ford announced that, beginning in 1996, its suppliers are expected to reduce costs, on average, by 5 percent each year for the next four years. Through supplier development, the auto assemblers help suppliers attain tough cost reduction goals.
Customers typically have two objectives for supplier development programs. The first is to reduce costs, improve quality, and improve delivery performance by completing projects jointly while the customer is on-site. The second objective is to teach suppliers a systematic process they can use to continue making improvements. All the auto assemblers we visited expected their suppliers to be self-sufficient in continuing a stream of cost reductions after they left. For suppliers, sustaining the change process on their own is a difficult task.
Which Suppliers To Develop
Supplier development requires a substantial commitment of human resources by both firms. So the selection of which suppliers to develop needs to be a strategic decision rather than simply reactive. Obviously, the overall dollar amount of purchases a company makes from a supplier is one of the key factors to consider when identifying development candidates. The percent of expenditures may accrue from high-volume purchases of a few materials or low-volume purchases of many materials. Suppliers whose materials account for a low percent of the customer’s overall expenditures but are strategically important as well should be considered. For example, relatively low-cost microchips are often key to the performance of consumer electronics. Though firms normally focus on direct materials, overhead items sometimes account for a high percentage of expenditures. GM applied its supplier development efforts to hospitals because it found that its largest cost as a corporation was for health care.
Considering how long the relationship with a supplier is expected to last is also important. Many firms are reducing and consolidating their supplier base, which often serves as a precursor to supplier development. Priority should be on suppliers that will be retained and awarded more business in the long run. If a product line will be dropped or a technological shift is expected, development of the current supplier may not be warranted. Supplier development also can be used to foster more competition within the supplier base. By assisting their weakest suppliers, customers can create a more competitive situation and ultimately attain a lower price and higher value for the end consumer.
The type of administrative or manufacturing processes used by the supplier should also be considered. The industrial engineering techniques used during supplier development are more effective for labor-intensive assembly processes than for capital-intensive ones. Consequently, in labor-intensive processes it is often relatively easy to achieve impressive cost reductions during supplier development projects.
SUPPLIER DEVELOPMENT IMPLEMENTATION
Many aspects of the supplier development implementation process itself were surprisingly similar across the companies we studied. As shown in Figure 1 [FIGURE 1 HAS BEEN OMITTED], we identified five common steps in the process: (1) gaining commitment from supplier’s top management, (2) identifying a leader in the supplier’s organization, (3) forming a capable buyer-supplier development team, (4) implementing data driven changes, and (5) demonstrating success using a “model line.” Each is discussed in detail below.
Supplier’s Top Management Commitment
From the perspective of all the customer firms we studied, gaining commitment of the supplier’s top management for development is the most critical success factor. Management must set objectives, provide resources, remove barriers, and reward change. Often it is difficult for top managers to admit that there may be a better way of doing things. As one supplier manager put it, to agree to participate in supplier development, “you have to eat your pride.”
In many cases, the supplier’s managers recognize the room for improvement in their firms and thus welcome customers’ help. This is especially true in the auto industry, with its intense pressures to lower costs. Without assistance, some suppliers have difficulty meeting cost reduction targets. At annual supplier conferences, they learn about how their customers have helped other suppliers. This gives them the nudge to ask those customers to do a supplier development project with them. One engineer told us about a supplier whose top management was so eager to improve the company’s performance that when the customer’s team arrived, machines on the shop floor were already on pallets ready to be rear-ranged.
Initially, many suppliers were not as willing to participate in development. From their viewpoint, opening up their plant to customers was not an easy decision. During development, the customer learns much more about the supplier’s operations and cost structure than can be gained through routine supplier visits. We heard comments such as “[The customer] sees all your dirty laundry” and “[We] couldn’t hide anything.” Suppliers are more willing to participate in the development project if they believe the customer is serious about a long-term relationship. Nevertheless, suppliers are sometimes coerced into participating. For instance, one customer sent an ultimatum to a particularly reluctant supplier that the company would lose the customer’s business if it did not participate in the supplier development program. The supplier not only ended up participating, but was successful in sustaining the change process and spreading the process improvement techniques to other facilities within its company.
Supplier’s Team Leadership
The supplier’s project team leader is pivotal to the success of the development effort. A team leader must understand the firm’s processes and have strong problem-solving skills. Having credibility with operators, middle managers, and top management throughout the firm is perhaps even more important. The leader must be able to persuade others in the firm that the change is necessary and beneficial to employees as well as to the entire organization.
During development, suppliers sometimes suggest using someone who is merely “available” as the team leader. In this case, the customer must intervene to ensure that the team leader is the very best candidate the supplier has to offer. Honda uses a litmus test when choosing a supplier’s project team leader; as one Honda executive stated, “It has got to hurt the supplier to take that person away from his normal job and put him on the project.”
The most difficult challenge facing the team leader occurs after the customer’s team has moved on to assist other suppliers–championing the necessary changes within the organization after the initial customer intervention is complete. Continuing the change process can be very difficult as the supplier’s normal day-to-day activities again begin to take precedence over improvement activities.
Building a Capable Joint Development Team
Supplier development needs to be anchored firmly in both the customer’s and the supplier’s organizations, leading to a joint team structure. All the customers in this study have formed separate supplier development groups within their purchasing organizations, staffed primarily by manufacturing or industrial engineers. The most common approach–used by Honda, Toyota, Ford, and GM–is to have full-time specialists who conduct the supplier development projects, becoming experts in the process.
Chrysler has a different approach. Its trained, full-time supplier development facilitators form supplier-specific teams made up of the appropriate Chrysler employees–representatives from quality, manufacturing, and design who are responsible for the supplier’s component. The make-up of the customer’s team varies from supplier to supplier, and the team can approve many changes on the spot. The interaction between Chrysler’s team members and the supplier’s employees helps build ongoing relationships.
Supplier development specialists and facilitators are selected and trained for people skills and, according to Ford representatives, for their “well-roundedness.” Chrysler considers enthusiasm, having a positive attitude, and being knowledgeable-but not egotistical–as important characteristics. Typically, the customer’s supplier development specialists or facilitators learn how to lead projects through experience by participating as members on supplier development teams. Ford specialists undergo one year of apprenticeship training before leading their own projects. Chrysler facilitators also complete a lengthy on-the-job training process.
To create the joint buyer-supplier team, the customer’s team joins forces with a cross-section of the supplier’s employees. Diversity increases the team’s creativity. Critical participants from the supplier’s organization include the team leader, operators, supervisors, and engineers. All must be freed from their normal day-to-day assignments. One manager at Honda commented on the “tug-of-war between having the best people on the project and taking them away from their normal jobs.” The role of the supplier’s top managers on the development team varied across the companies we studied. Honda initially required a supplier’s top executives to be on the team, but then discovered that operators were uncomfortable giving suggestions when their plant manager was in the room.
The number of team members from the supplier also varied by company. When Honda undertook its first few supplier development projects, the company required its suppliers to assign three to four people to the team full-time for three months. But this was a large burden for the suppliers, who often operate with very lean staffing levels. Honda has since modified its approach, using a full-time supplier team leader who marshals other employees to support the project on an as-needed basis. GM, on the other hand, typically involves 10 to 12 people full-time from the supplier firm to participate in the one-week development workshops. Participation in Ford’s one-week programs range from 15 team members in a small supplier facility to about 30 people in a larger facility. By using a relatively large team, Ford and its suppliers are able to undertake several projects simultaneously during the workshops.
Before any changes are made, a development team must thoroughly understand the supplier’s processes and systems. Historical supplier production performance data, such as downtime, daily production rates, cycle time, rework rates, and scrap rates, are used to pinpoint problem areas. If the supplier does not routinely collect these data, measures must be developed and data must be collected.
The most frequently used data source comes from direct observations of the supplier’s production process. For example, Honda’s supplier development teams use hand sketches of the operations on the shop floor to identify opportunities for improvement. These sketches also serve as documentation for “before” and “after” examples. General Motors and Chrysler use techniques such as process flow charts to identify the non-value-adding activities that should be eliminated. Transit, storage, waiting in queues, and inspection are non-value-adding activities to be eliminated.
Actual observation of the process is a key step for several reasons. On the shop floor, such opportunities for improvement as elimination of wasted motion or layout changes to improve ergonomics are often obvious to a trained outsider, who doesn’t take the existing layout as a given. In one case, an operator used a small carton to hold assembly parts at her work station. But she had to leave her work station frequently to fill the small carton by dipping into a larger carton of parts. By moving the large container to a position next to the work station, the step of filling the smaller carton was eliminated.
Although administrative processes cannot be observed easily, using a flow chart to understand the processes can also identify non-value-adding steps. General Motors helped a hospital reduce its lead time for determining radiation treatment for oncology patients from eight days to 24 hours. Two changes were made in the process. First, the standard cases were segmented from the few that were unusual and required more time. Second, all the key players met simultaneously rather than sequentially to develop the treatment plan.
Another benefit of observing the process is that the team members are able to interact with the shop floor operating associates. Through interaction, the team builds support for changes from among those people who will be affected the most–the operators. And the operators are able to learn techniques for improving the process by watching the supplier development team. Several of the suppliers we visited used the customer’s development effort as a way to increase their employees’ involvement in continuous improvement efforts.
Because the operators have firsthand experience with the process, they are the major source of improvement ideas. One manager commented that 18 operators generated 60 to 70 ideas for improving one production line. A GM manager stated that, on average, 100 to 200 improvement ideas are generated by the development team during a typical workshop brainstorming session. But, as he pointed out, just generating the ideas is not enough. The fact that employees’ suggestions are taken seriously and those that are viable are implemented is instrumental in gaining employee support for the changes.
Honda’s supplier development specialists also recognize the importance of implementing operators’ suggestions. In one of its supplier plants, an operator who had to bend over to use a light board for inspecting switches suggested it would be much easier if the light board were at a 45 degree angle. So during lunch that day the development team installed a stand to hold the light board as she suggested. When the operator came back from lunch, “she was so happy she almost cried.” Employee involvement in process improvement can have other benefits as well. In one plant, absenteeism dropped from 14 percent to 4 percent after the supplier development efforts got under way.
Success of a Model Line
As a GM manager commented, “Success gets everyone’s attention.” All the major auto makers we talked with select a portion of their supplier’s production plants called a “model line” to demonstrate the improvement techniques. Each model line selected is considered to have a lot of “low-hanging fruit” so that easily made changes can demonstrate dramatic results (see Figure 2 [FIGURE 2 HAS BEEN OMITTED] for some commonly used improvement methods). According to Chrysler, the area around the model line may be painted and cleaned so that it grabs the attention of everyone in the plant.
The significant improvements in productivity that accrue from demonstrating the techniques using the model line generally win over those in the supplier’s organization, such as middle managers and manufacturing engineers, who may have been skeptical of the potential benefits. Although the customers in this study consistently remarked that they preferred to work on a line producing parts for their company, they had occasionally worked on a model line producing another customer’s parts if that was a major problem area for the supplier with all its customers.
Though many problems are identified by operators during the development process, industrial engineering solutions such as those shown in Figure 2 are often used to correct them. Simple techniques such as COPDS (Clean, Organize, Pick-up, Discipline, and Safety) are applied. According to one team member, “Often costs can be reduced by 15-20 percent just by cleaning and organizing the work area.” For instance, having the appropriate tools at the work station rather than in a remote storeroom can reduce the time required for a die or fixture change. Cleaning and organizing a raw material storage area also facilitates simple, visual inventory control.
Typically, the improvements made during supplier development include changing the process layout to remove bottlenecks and improve ergonomics. Layouts are often changed from functional ones, in which similar operations are grouped together, to cellular layouts, which are similar to “mini assembly lines.” This reduces the time required for changing the equipment over from one product to another and simplifies the flow of the product through the process. Layout changes can improve productivity to the point at which the number of operators can be reduced. Employees whose jobs have been eliminated can be assigned to other areas of the process. Some suppliers use the freed-up positions to devote full-time employees to process improvement activities in their facility.
Another common improvement technique involves developing and implementing pokayoke systems to build “mistake-proofing” into the production process. Poka-yoke systems are simple process changes used to prevent errors coupled with simple sensors that detect errors at their source. One supplier was assembling a part with a plastic cap that the operator occasionally forgot to install. The supplier development team installed a simple sensor to check every part for the plastic cap at that work station. Parts without the cap were rejected and immediately reworked, thereby ensuring that defective parts were not shipped to the customer.
Reduction in the time required to change from one product to another is a common improvement made during supplier development. When the dies or fixtures for a machine are being changed, production stops. Reducing the time required to set up for a different product effectively increases the overall capacity of the plant. Simple changes, such as having the proper tools and fixtures or dies stored near work stations, significantly reduce setup time. Through operator training, one supplier development project reduced the time required to change dies from an hour and a half to 30 minutes; another cut 65 minutes down to 10 minutes by ensuring that the proper tooling was readily available.
SUSTAINING THE IMPROVEMENT PROCESS
Although sizable improvements have been made in supplier’s facilities in the customers’ presence, most suppliers find it difficult to continue making improvements after the customer team leaves. One major auto assembler modified its development approach after a follow-up revealed that out of 50 suppliers with whom it had initially worked, none had successfully sustained the change process. This company’s experience is not atypical. Other auto assemblers and most of the suppliers we interviewed stated that difficulties are often encountered when the suppliers try to continue implementing changes independently.
In our study, we identified three suppliers that had been successful in sustaining the momentum of change after their customers had completed their intervention. They not only continued to make improvements in the initial plant where the customer had been involved, but they were also spreading the techniques they learned to other plants in their organization. Four factors were found to be instrumental in sustaining and spreading improvement activities throughout a supplier organization: (1) hands-on training of supplier team members, (2) follow-up and measurement by the customer on a regular basis, (3) fit of the approach with the supplier firm’s corporate culture, and (4) the support structure in the supplier’s organization.
Large suppliers that wanted to spread the learning to multiple sites throughout the organization assigned engineers from these other locations to be on the supplier development team. The team members felt they needed to participate in two supplier development projects before they were ready to lead a project using the techniques at their own facilities. Parker-Hannifin has used this approach to successfully implement 200 projects in 40 of its own manufacturing locations.
Regular follow-up by the customer provides deadlines to motivate the supplier to stay on track with the changes. During supplier development, the team generates an extensive list of improvement opportunities. Follow-up by the customer on a regular basis keeps the improvement process as a priority of the suppliers’ management. Without these regular follow-ups, other activities soon take precedence over improvement activities. Measuring the suppliers’ improvement progress and providing feedback to the supplier on how they are performing can also increase the chance that the supplier will continue to improve.
Consistency between the concept of continuous improvement and the supplier’s corporate strategy and culture is key to adopting improvement practices successfully. For example, Parker-Hannifin saw Honda’s BP approach as consistent with its own corporate strategy; consequently, the program had very high-level support within the supplier company. In this case, supplier development can more appropriately be viewed as a pull from the supplier’s top management rather than a push from the customer.
Another example is from a supplier that was implementing a program to increase associate involvement that coincided with the supplier development project. This supplier had two plants at the same location, but only one was originally involved with supplier development. The techniques spread very quickly from one plant to the other because, as a manager commented, “When Plant One learned what was going on in Plant Two, they wanted to be involved.”
Most of the customers in this study have concluded that to sustain supplier development efforts over time, a support structure must be built into the supplier’s organization. For example, Honda asks its suppliers to set specific process improvement goals as part of its annual planning process. Some of the suppliers have had the initial team leader become the internal champion for the improvement process. Several others have hired an industrial engineer to shepherd the improvement process.
WHY SUPPLIER DEVELOPMENT WORKS
There are several reasons why customerdriven supplier development can improve a supplier’s processes and systems. Many suppliers would like to improve their processes and systems, but frequently find themselves caught up in daily activities. However, when a customer wants to undertake a supplier development project, the supplier’s management and employees usually find a way to accommodate the request without jeopardizing their production goals. As an outsider looking in, the customer provides a fresh perspective that may challenge the underlying assumptions in the supplier’s organization. The customer legitimizes the need for change and is generally able to overcome the supplier’s organizational inertia that tends to resist changes. This is illustrated in Figure 3 [FIGURE 3 HAS BEEN OMITTED].
Internally, organizational practices are often accepted as a given, and many unproductive activities are continued because, as managers insist, “We’ve always done it that way.” The customer, however, is more likely to question the underlying assumptions for processes and systems, and therefore to identify improvements. One supplier development team questioned why a supplier was budgeting $5,000 a month for scrap. the team investigated the underlying causes of the scrap and found ways to reduce it. Another supplier that had grown rapidly was still making daily shop floor assignments using an informal one-to-one approach. The customer suggested daily planning meetings to review assignments with all employees at one time as a more efficient alternative.
Organizational policies and procedures are often barriers to change. We found that the presence of the customer short-circuited the red tape and “made things happen” within the supplier’s organization. It is not unusual for the development team to circumvent the supplier’s normal policies and procedures, especially capital budgeting procedures. One supplier plant manager commented, “If the team wanted to spend money, then we did it. If they wanted to change the layout, we did it.” Improvement projects developed internally by the supplier typically go through its normal prioritization and approval process. In fact, if an internal team is able to circumvent normal procedures without the customer acting as a catalyst, resentment from within the supplier’s organization is likely to occur.
People can sometimes be the major force behind making changes in an organization, but they can also be the biggest obstacle to change. We found that suppliers’ employees seemed to be more susceptible to change when they knew the customer was driving the change process. In most cases, the customer was well-respected and viewed as an expert by the employees. When the latter witnessed how changes directly benefitted them, they tended not only to stop resisting change, but also to become actively involved in implementing it. One customer representative, who had worked on several supplier development projects, stated, “We worked more as consultants than as customers.” The customer often garners credibility with the supplier firm’s employees and brings legitimacy to the proposed changes.
Given the transformations that have occurred in the U.S. auto industry during the past decade, the emergence of supplier development is not surprising. Customers have reduced the number of direct suppliers used, thereby becoming more dependent on those they have retained. To reduce their exposure to risk, customers have begun to forge long-term partnerships with remaining suppliers. In response, supplier firms have made customerspecific investments and have increased their dependence on their customers. All firms in the value chain–customers and suppliers alike–now recognize that their operations are becoming inextricably interlinked, and their welfare is mutually dependent.
In the auto industry as well as many others, the entire value chain is being pressured to coordinate production activities more efficiently to cut time and costs. From a strategic perspective, states Hines (1994), supplier development enables “supply chain responsiveness” and provides “the mechanisms to facilitate… improvements up and down the supply chain.” Customer firms use their knowledge, skills, and experience to assist their suppliers, benefitting in turn through improved delivery performance, fewer production disruptions caused by poor quality materials, and lower costs. The supplier benefits by becoming more competitive with other suppliers as performance improves and costs go down.
Of course, in addition to the tangible benefits of supplier development that can be traced directly to the bottom line, intangible benefits may also be attained. The experience of working together on development efforts opens the door for continued collaboration and joint innovation between suppliers and their customers, creating an environment that is conducive to a long-term relationship. Supplier development is a vehicle that can be used to increase the competitiveness of the entire value chain.
The remaining challenge that faces customers and their suppliers is to enhance the track record in sustaining the improvement process after the customer team has moved on. Hands-on training of the supplier’s team members, ongoing customer follow-ups on a regular basis, linking the improvement efforts to the supplier’s overall strategy, and building a support structure for the change process into the supplier organization should facilitate continuous improvement by suppliers.
In the long run, creating a lean and responsive value chain composed of fewer suppliers and closer working relationships may prove to be the critical competitive tool for all the firms in a value chain. From the perspective of the suppliers, the ability to learn and adopt the improvement techniques their customers demonstrate may provide their critical competitive advantage. The most successful suppliers will be those that have the ability to continue improving their performance beyond their customer’s current requirements.
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Janet L. Hartley and Thomas Y. Choi are assistant professors of management at Bowling Green State University, Bowling Green, Ohio, The authors wish to thank the managers of Chrysler, Ford, General Motors, Honda of America, Toyota, and the eight supplier companies for their generosity and graciousness in sharing time, insights, and experience. Thanks also to Chan Hahn, Gwen Jones, Daniel Bragg, and Charles Watts for commenting on an earlier version of the paper. Partial funding for this work came from the Ohio Board of Regents through its Research Challenge program.
COPYRIGHT 1996 JAI Press, Inc.
COPYRIGHT 2004 Gale Group