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 / Summer 2007 / Issue 47(originally published by Booz & Company)


Win-Win Sourcing

Such metrics are not direct copies of the Toyota or Honda metrics. Indeed, the best knowledge-based sourcing practices are tailored to each company’s situation. For example, Toyota and Honda typically favor suppliers whose factories are in close proximity to the automakers’ plants; the automakers frequently acquire an ownership stake in the businesses. Although at times this leads to somewhat higher costs because suppliers are located in more developed and expensive regions, Toyota and Honda prefer this system because it minimizes product lead times, eliminates quality and disruption risks, affords them more control, and dovetails well with just-in-time, lean manufacturing philosophies.

But this approach overlooks the favorable economics found in low-labor-cost nations like China, India, Vietnam, and the Philippines, benefits that should be strongly considered — though not necessarily as the dominant factor — in a procurement program. Western companies can counterbalance the advantages that Japanese companies gain from proximity and ownership through carefully constructed strategic relationships with key suppliers elsewhere around the world.

Every company has internal strengths that can allow it to change models. But to fully make the transition to knowledge-based sourcing, four critical changes are required:

1. Establish suppliers as strategic long-term partners. Toyota invests directly in its suppliers — using a keiretsu model of interlocking ownerships — to manage its alliances. But that isn’t necessary. More important is an alignment of goals and cultures.

Indeed, one of Toyota’s preferred suppliers is not part of its keiretsu. Johnson Controls Inc., a U.S.-based  company that makes automotive interior and battery products, has been cited by Toyota for perfectly matching the automaker’s standards of quality, on-time delivery, diversity, and performance excellence. By sharing operations, knowledge, and expertise, Toyota and Johnson Controls have developed a mutual learning and development pact buoyed by a steady rate of manufacturing improvement.

The same is true for most other Toyota suppliers. They often describe the automaker as both their best customer (providing predictable volumes and profitable margins) and their most demanding customer (requiring excellent performance levels, continuous improvement, and highest quality at lowest total cost).

For suppliers to become willing partners, they must be convinced that the new knowledge-based practices — setting cost, quality, and delivery targets and then more ambitious ideal cost and performance levels — will not be used against them. It must be clear that suppliers who meet the required standards and consistently improve performance will benefit from more consistent business, which in turn will allow them to operate more efficiently and enjoy higher profit margins in the future.

Long-term partnership does not mean exclusivity. At times, when these relationships are not producing the expected returns, manufacturers choose a second supply source as a backup. Chiefly, this creates competition that encourages the original supplier to meet its targets and protects the manufacturer from receiving parts that are lower quality, more expensive, or delayed. If a supplier is continually unable to raise its performance to agreed-upon levels, manufacturers transfer some volume to the secondary source, always in hopes of eventually improving the initial supplier’s operations sufficiently to take on more business again.

2. Set up an ongoing system to eliminate waste through collaboration across the supply chain. One facet of knowledge-based sourcing that many manufacturers readily embrace is the drive for transparency in costs. Suppliers are asked to reveal their ideal cost performance: the cost to produce components under perfect circumstances. In a true collaboration, this would then lead to a mutual effort between suppliers and manufacturers to improve production throughput, quality, and delivery, with the ideal cost performance demonstrating the potential savings that suppliers could achieve. In many current cases, however, the ideal cost performance becomes yet another target, a new form of leverage that manufacturers use to press suppliers to cut their margins. This defeats the entire knowledge-based effort; rather than providing incentives to collaborate, it gives suppliers every reason to obfuscate their true costs.

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  1. Bill Jackson and Conrad Winkler, “Building the Advantaged Supply Network,” s+b, Fall 2004: Collaborative strategies with examples from aircraft, consumer products, and auto manufacturers, plus advice for step-change planners. Click here.
  2. Dan Jones and Jim Womack, Seeing the Whole: Mapping the Extended Value Stream (Lean Enterprise Institute, 2000): Practice guide with diagrams and techniques for mutual analysis and lean thinking.
  3. Art Kleiner, “Leaning Toward Utopia,” s+b, Summer 2005: “Creative Mind” profile of the authors of Lean Thinking and Lean Solutions, the most popular Western explicators of lean methods of thinking and production. Click here.
  4. Jeffrey Liker and David Meier, The Toyota Way Fieldbook: A Practical Guide for Implementing Toyota’s 4Ps (McGraw-Hill, 2005): Strategies and exercises derived from ongoing studies of Toyota’s effectiveness.
  5. James P. Womack and Daniel T. Jones, Lean Thinking: Banish Waste and Create Wealth in Your Corporation (Free Press, 2003): Relevant book for lean operations and supply chain management.
  6. James P. Womack and Daniel T. Jones, Lean Solutions: How Producers and Customers Achieve Mutual Value and Create Wealth (Simon & Schuster, 2006): Applies lean ideas to retail, customer relationships, services, and society at large.
  7. For more articles on supply chains, sign up for s+b’s RSS feed. Click here.
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