Lecture 13-14

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Vendor Selection and Development :

Vendor Selection and Development By:Mian Hafeez Kalim Lecture 13-14


University of Management and Technology 2 Synopsis Views of vendors to Big Three Useless efforts to make Japanese Keiretsu How Toyota and Honda made an American Keiretsu with its North American suppliers Key elements of successful relationship

Supplier to Ford, GM & Chrysler:

University of Management and Technology 3 Supplier to Ford, GM & Chrysler “The Big Three [U.S. automakers] set annual cost-reduction targets [for the parts they purchase]. To realize those targets, they’ll do anything. [They’ve set free] a reign of terror, and it gets worse every year. You can’t trust anyone [in those companies].” —Director, interior systems supplier to Ford, GM, & Chrysler, October 1999

Supplier to Ford, GM, Chrysler & HONDA:

University of Management and Technology 4 Supplier to Ford, GM, Chrysler & HONDA Honda is a demanding customer, but it is loyal to us. [American] automakers have us work on drawings, ask other suppliers to bid on them, and give the job to the lowest bidder. Honda never does that.” —CEO, industrial fasteners supplier to Ford, GM, Chrysler, & Honda, April 2002

Supplier to Ford:

University of Management and Technology 5 Supplier to Ford “In my opinion, [Ford] seems to send its people to ‘hate school’ so that they learn how to hate suppliers. The company is extremely confrontational (offensive). After dealing with Ford, I decided not to buy its cars.” —Senior executive, supplier to Ford, October 2002

Supplier to Ford, GM, Chrysler & TOYOTA:

University of Management and Technology 6 Supplier to Ford, GM, Chrysler & TOYOTA Toyota helped us dramatically improve our production system. We started by making one component, and as we improved, [Toyota] rewarded us with orders for more components. Toyota is our best customer.” —Sr. executive, supplier to Ford, GM, Chrysler, & Toyota, July 2001

Following steps of Toyota & Honda:

University of Management and Technology 7 Following steps of Toyota & Honda Building of supplier KEIRETSU in 80s and 90s by American corporations i.e. GM, Ford and Chrysler A Keiretsu is a close knit network of vendors that continuously learn, improve and prosper along with their parent companies. Big three, therefore Awarded suppliers a long term contract Encouraged top tier vendors to manage lower tiers Started delivering just in time But didn’t alter the fundamental nature of their relationship with suppliers

Failure….and even a worse one:

University of Management and Technology 8 Failure….and even a worse one After a failure, Ford used online reverse Auctions to get the lowest prices for the components General motors writes contracts that allow it to shift to a less expansive supplier at a moment’s notice. Chrysler tried building a Keiretsu but, Daimler took over the company in 1998, which stopped the efforts

Toyota & Honda proved it WRONG:

University of Management and Technology 9 Toyota & Honda proved it WRONG Actual situation was a bit different Toyota & Honda struck remarkable partnerships 60% of 2.1 m total Toyota Lexus & 80% of 1.6 m total Honda Acura were manufactured in North America through partnerships of same suppliers of Big Three Successfully built similar supplier webs in North America that they used to build in Japan

Survey in North America after making an American Keiretsu, reports:

University of Management and Technology 10 Survey in North America after making an American Keiretsu, reports According to a survey by a Michigan-based research company in 2003 Toyota and Honda gained top rankings i.e. 1 st and 2 nd in the categories of most preferred customers, trust, perceived opportunity, better communicators, concerned about supplier’s profitability Nissan got third, followed by big three on 4 th , 5 th & 6 th position Toyota & Honda designed new cars in 1-1.5 years as against Ford, Chrysler & GM whose took 2-3 years

Key elements of successful relationship:

University of Management and Technology 11 Key elements of successful relationship Understood how their suppliers work. Turning supplier rivalry into opportunity. Supervising their vendors. Developed compatible technical capabilities. Sharing of information intensively but selectively. Conducted joint improvement activities.

Understood how their suppliers work:

University of Management and Technology 12 Understood how their suppliers work Learn about supplier’s businesses Send executives for long times to see & understand for themselves Managers at all levels study suppliers at their first hand Knowledge about operations & complete cost structures Honda, made a trial in 1987 & started business in 1988 Whole year they took to understand how their suppliers work

Turning supplier rivalry into opportunity:

University of Management and Technology 13 Turning supplier rivalry into opportunity Encouraging competitions throughout vendor’s network right from the product development stage Toyota asked for designing of tires for it’s vehicle programs to several vendors Evaluating performances of tires based on vendor’s data as well as Toyota’s road tests and awarded contract to the best Contracts through the life of a model Slipping of performance may shift the contract to it’s competitor Improving performance of previous vendor will again start business with Toyota, but with another program to regain it’s market share

Supervising their suppliers:

University of Management and Technology 14 Supervising their suppliers Toyota and Honda don’t take a hands off approach with their vendors as was assumed by many researchers. Toyota & Honda set targets for their vendors Monitor their performances all the time Helping them improve with first, second & third tier vendor Honda sends report cards every month to their vendors Containing reports about quality, delivery, quantity delivered, performance history, incident report and comments Incident report had two sub sections; one for quality and other for delivery.

Developing compatible technical capabilities:

University of Management and Technology 15 Developing compatible technical capabilities Toyota & Honda don’t source from low-wage countries much; their supplier’s innovation capabilities are more important than their wage costs A check list with hundreds of measurable characteristics for each component Toyota & Honda start product development process with their suppliers on-site by teaching them how to collect data that American vendors neither had nor calculated. R&D sharing at their sites making them realized about innovative capabilities they can adopt for.

Developing compatible technical capabilities:

University of Management and Technology 16 American vendors complain that Toyota and Honda give them vague specifications for new tires. Doesn’t spell out the level of resistance of tire; it would only demand right feel , a characteristic that is hard to quantify. Gotsu , Gotsu (low freq. high impact motion tires) Buru , Buru (High freq. low impact vibrations they feel in their belly) Guest engineer program Developing compatible technical capabilities

Sharing information intensively but selectively:

University of Management and Technology 17 Sharing information intensively but selectively While Chrysler shared hell of data and held numerous meetings with vendors. The philosophy seemed to be “ If we share all information with vendors and keep talking to them intensely, they will feel like partners.” Toyota and Honda however believed in communicating and sharing information with vendors selectively and in a structured fashion. Clear agendas of meetings, specific times and places Toyota divides components of new product into two categories; one that can be easily made by vendors and other that must be developed at Toyota

Joint improvement activities:

University of Management and Technology 18 Joint improvement activities No. of Toyota & Honda engineers stationed in United States for performing KAIZEN activities Big three spends a day to a week on improvement activities while Honda spend 13 weeks By applying KAIZEN supplier’s productivity was increased by about 50%, improved quality by 30% and reduced costs by 7% Suppliers have to share 50% of cost savings with Honda This becomes baseline for new contracts Suppliers can apply KAIZEN to other processes as well