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


Win-Win Sourcing

With knowledge-based sourcing, a short time after product launch, the engineers are pulled from the project and redirected toward developing new products or new versions of existing products. The manufacturing function, meanwhile, can focus attention on in-plant productivity improvements, not on retooling for product redesigns. In other words, by creating a well-managed up-front phase, manufacturers gain a long-term, significant, and often unexpected benefit. Suppliers are equally enthusiastic. (See “Innovation Agility,” by Kevin Dehoff and John Loehr, s+b Summer 2007.) “U.S. automakers reinvent for each program,” comments one supplier. “They make eight to 10 design changes for each program, while Toyota makes maybe two. What’s more, [the Detroit manufacturers] continue to change up to the last minute but don’t want to pay for the changes.”

4. Respect and develop human capabilities. Underpinning knowledge-based sourcing is a significant degree of people development. Toyota and Honda, as well as many other Japanese companies, invest in instilling in their employees a profound sense of cooperation. They also build a deep and company-specific well of product and process knowledge, identifying and codifying their best practices and pursuing ideal performance levels with their supply base. Few Western companies can claim this type of educated workforce, and thus a major training effort is needed to improve overall procurement performance.

In companies that pursue knowledge-based sourcing successfully, we see the following skills present among a wide range of employees, from the shop floor to the purchasing department:

  • They can map the underlying processes, materials, and technologies that lead to or promote competitive performance.
  • They can produce cost models that accurately reflect supplier and industry economics.
  • They can identify world-class factory output.
  • They can help suppliers reach recognized top-of-the-line standards.

Shifting from a traditional manufacturing model to this new knowledge paradigm is culturally difficult. Managers at many companies change jobs often; this makes it virtually impossible to acquire the depth of experience and information needed to work closely with suppliers on continuous cost and performance improvement. Moreover, compensation is usually based on straightforward cost and revenue benchmarks, not on quality and performance improvements. That is why one of the first steps is to design creative incentives that reward employees for successful long-term supplier relationships and for improved communications between purchasing, engineering, and the executive suite. These incentives can alter old-fashioned perceptions quickly. Other forms of support include focused training — on topics such as supplier relationship management and development, cost modeling, and industry economics — and career tracks that allow people to grow and develop without shifting positions. Some companies have successfully developed and implemented a training and certification program for cost management that encompasses all of the purchasing and much of the engineering organization.

The Path to a New Model
The practice of knowledge-based sourcing is still evolving; a “next-generation” approach is emerging now as more companies in a variety of industries adopt Japanese techniques and incorporate them into their own corporate cultures. The most effective manufacturers will build up supply chain management teams with differentiated capabilities, balancing commercial, technological, and managerial skills. They will align their values, incentives, and key performance indicators to the relationship-based system, focusing on performance management and support instead of by-the-book cost reductions. They will build networks of suppliers who will work together more regularly and effectively across the value chain, ensuring compatibility among components and seamlessness among their processes. Finally, they will adopt more modular approaches in which components are distinctive when necessary, but standardized when distinction matters little to customers. In short,  careful attention to sourcing quality and logic will finally be seen as the strategic capability it deserves to be, positioned with a top management mandate.

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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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