By bidding out every program in an effort to continually shave its supply costs, one multinational automaker found itself burdened with 130 fastener suppliers for its 21 plants in North America. Multiple suppliers were producing nearly the same fasteners. Machinery was underutilized and economies of scale were diminished. Scale advantages were also reduced in the purchase of raw materials. For instance, all the suppliers bought steel in costly separate purchases, instead of buying in bulk at a lower price.
Management inefficiencies were widespread. Hundreds of managers were working the “interface” between the auto company and its suppliers, but none of them had the time, inclination, or familiarity with one another to think about anything other than their immediate problems. The buyer’s purchasing managers had toured only three of the 130 plants in its supply base. When there was a quality flaw in a fastener, the suppliers’ engineers felt compelled to explain why it wasn’t their fault, instead of, for example, considering how the product might be redesigned to use fewer fasteners and thus reduce the opportunity for flaws.
Even if they had wanted to try, suppliers didn’t have enough information to identify design improvements for parts, or opportunities to lower costs through part standardization. The buyer’s engineers didn’t work with the suppliers’ engineers to resolve these problems, because they were too busy designing the next fastener. The buyer and suppliers never talked about investments for the future. With so many suppliers to deal with, it was impossible for the buyer to learn about an individual supplier’s capabilities, much less think about the supplier’s vision. Moreover, since none of its suppliers had plants in countries with lower manufacturing costs, the company launched a separate offshore manufacturing initiative, which further complicated relationships with suppliers.
Frustrated by the cumulative effects of rising costs, inefficient management, and missed opportunity, the auto company decided it had to do a thorough restructuring of its supply base. Often it is the savings from restructuring a bloated supply base that pave the way for a company to transition to an advantaged supply network. Starting with a clean sheet of paper, the automaker’s top management imagined an entirely new structure and composition for its supply base. They asked basic questions: What would the ideal set of suppliers look like if we started over today? How many plants do we need? What should their size be? Where should plants be located? What should different plants be producing? What type of equipment should we have to produce which parts? Where is the waste, and how can we reduce it? How do we keep innovation and competition strong?
Once it had a clear vision for the network it wanted, the automaker approached a set of suppliers it thought had visionary management, strong financial health, manufacturing facilities close to the ideal, and a willingness to invest in the network. As it turned out, self-selection was also important to the process; not all suppliers invited to join the network signed on. In the end, the automaker’s vision of a new supply base reduced its fastener suppliers from 130 to just five.
Each of the suppliers in the new network had a focus for its operations, but each also had capabilities that overlapped with those of the four other suppliers. Having suppliers with overlapping capabilities promotes healthy internal network competition, while suppliers still can sharpen their skills in specific areas. In the perfect network, each supplier has enough latitude to build the capabilities to achieve competitive advantage, while serving the customer that has committed to planning for and sharing economic benefits. Additionally, overlap ensured there was backup manufacturing in case one of the suppliers failed.