Wednesday, December 30, 2009

World Class Suppliers Need World Class Customers

As part of their effort to slash the cost of auto parts by 30% over the next three years, Toyota met with its suppliers last week to enlist their help in the process. Based on their reputation for dealing with suppliers, I'm guessing that Toyota will approach the process in a much different manner than most companies, and the process will be very successful.

Instead of squeezing suppliers by beating down prices and lengthening payment terms, companies like Toyota work with suppliers to find improvements in designs and processes that lead to real and sustainable cost reductions. When approached in this manner, the supplier and customer benefit from the process and the savings result in strengthening, rather than weakening, the supplier.

Two Glaring (and Common) Examples

I once worked with a Fortune 500 company that issued a policy for its divisions to lengthen payment terms to all suppliers. Based on the formula, the new policy could result in payment to a supplier being delayed by up to 90 days after receipt of the product or service.

Procurement professionals at a particular division for the company (Division A) implemented the policy and were praised (and rewarded) by the corporate office. One of Division A's suppliers was another division of the company (Division B). As a result of the change in policy, Division B cut off shipments of a critical component to Division A because it paid its invoices too slowly. Because of this, Division A's shipments fell because it couldn't get the component elsewhere; costs increased (due to production stoppages); and profits dropped because of its inability to ship and invoice its customers. Division B's profits also fell because it stopped shipping to Division A.

And another . . .

In another example, a friend of mine owns a company that supplies parts to the Detroit automakers. During a visit to one of the automaker's factories, he noticed a problem in the production line with the assembly of a particular model. As part of the process, the car was flipped to enable installation of a particular subassembly. Problems occurred because the subassembly could not be completed until the car was turned back upright, and it frequently fell apart before it could be secured.

On his own accord, my friend developed an inexpensive grommet that could be placed on the subassembly to properly secure the parts as the car was flipped upright. After the final assembly was bolted together, the grommet could be easily cut away, thereby completely eliminating the problem.

the customer adopted the idea and changed the process to utilize the grommet. Even though the grommet was a very low cost part, the automaker's procurement department - in an effort to further reduce the cost - decided to purchase the grommet from a competitor instead of from the company owned by the person who developed the part. In a situation where a supplier - without direction from the customer - took the initiative to solve a problem that caused delays, extra costs, and headaches for the customer, the customer displayed a lack of respect for the supplier by awarding the business to another company. Needless to say, my friend was not motivated to solve future problems for the customer.

Stop the Madness

The above examples are unfortunately fairly typical of western business. If we are to come out of the recession strong and ready to compete, we have got to learn that the relationship with a supplier is based on more than price and payment terms. A company cannot win if its suppliers lose. Besides the obvious, who wants to do business with a loser anyway?


Wil Ferch said...

Too much to say here....all of your examples ring true to some degree wherever we look.

Some summary comments

- the examples you cite are very much like the 1950's thinking in corporate America that "quality costs". It took 40 years, and having our butts handed to us by superior foreign auto competition (typ. from Japan), that quality = less variation in the process = less waste = less cost = better and cheaper overall.

for some industries simply substitute the word "safety" for "cost" and the same text follows. Safety = working under Operational Discipline = less variation and more process control = less fires and explosions ,etc = less cost to the company = better.

Unfortunately, some companies still live under a rock and have learned nothing over the past 40 years and continue to suffer 50's thinking. We can't do quality because it "costs"...we can't do safety becasue it "costs".

The grommet and other examples you cite bring up two important subsets:
1.) narrow and improper view on "cost" vs "value"...and all that entails- lack of training, understanding, etc, of "why" a directive was given. People's actions may be very different if they had the bottom-line vision of "why" they are doing things, and not just "following orders".
2.) working the "old" system and simply "forcing" change...without deliberate work-process improvements installed to acoommodatye this. Very poor understanding of the learnings that more progessive companies have embraced and benefitted from

Gregg Stocker said...

Will-You make some great points. And with the slow death that these companies experience, it is difficult to tie it to specific behaviors or actions that have taken place over many years.

Thanks for the comments.

Zero Perdas said...


This kind of cost reduction approach is not privilege of car makers. I can see the same in consumer goods products, pharma and food companies. The first action to have "war in costs" is to create an department to deal with this. If we associate specific goals to the people that work in that department, and provide to then adequate spreadsheet - Ok..we have a program to reduce costs. I agree with you, cost reducing is a problem to be aproached by all elements of the VSM. It includes Supliers.

J.Paulo Divino

Gregg Stocker said...

J. Paulo, I completely agree. It seems that other industries have unfortunately followed the poor practices of the U.S. auto industry. The enlightened companies (those who approach cost reductions from a systems perspective) will come out on top.