EXECUTIVEREPORTOFKEYRESULTSOFRECENTRESEARCHON

SUPPLIERDEVELOPMENTSTRATEGIESANDOUTCOMES
PreparedbyRobertHandfield,Director
SupplyChainResourceConsortium
NorthCarolinaStateUniversity
CollegeofManagement
http://scrc.ncsu.edu
(843)8145494
for
JonStegner
Director,SupplyManagement
DelphiAutomotive
Detroit,MI

EXECUTIVE REPORT OF KEY RESULTS OF RECENT RESEARCH ON

SUPPLIERDEVELOPMENTSTRATEGIESANDOUTCOMES
SUMMATIVEOVERVIEW
This executive summary provides key research results based on recent research on supplier
developmentfromthefollowingsources:

DanielKrause,DoctoralDissertation,ArizonaStateUniversity(1994)
Handfield, RobertandKrause,Daniel,SupplierDevelopment ModuleReport,Global
Procurement and Supply Chain Benchmarking Initiative, Michigan State University
(1996)
Krause,DanielandHandfield,RobertDevelopingaWorldClassSupplyBase,CAPS
ResearchReport,CenterforAdvancedPurchasingStudies:Tempe,Arizona,1999.
Handfield,Robert,Krause,Daniel,Scannell,Tom,andMonczka,R.,AvoidthePitfalls
inSupplierDevelopment,SloanManagementReview,vol.41,no.2,Winter2000,pp.
3749.

Resultsofthisresearchindicatethat:

Supplier development strategies can result in significant improvements in supplier

performance,including
o Reducingproductdefectsby590%,
o Improvingontimedeliveryby615%,
o Reducingorderfulfillmentcycletimeby3080%,
o Improvingproductperformanceby10to30%
Notallsupplierdevelopmentinitiativesaresuccessfulinfact,asmanyas50%arenot
successful,duetopoorimplementationandfollowup.
Most firms engage in reactive supplier development approaches (which addresses
sporadic problems),as opposedto strategic supplier development approaches (which
addressescontinuousimprovementoftheentiresupplybase)
Approaches to supplier development include rewarding performance (The Carrot),
penalizingpoorperformance(TheStick),ongoingdetailedassessmentandfeedback
(Measurement), and direct involvement in suppliers operations (HandsOn
Approach)
Researchonwhichapproachismosteffectivesuggeststhatacombinationofapproaches
may be appropriate under different circumstances, depending on the nature of the
supplier,thetypeofcommodity,andthemanagementteamatthesupplier.

EXECUTIVE REPORT OF KEY RESULTS OF RECENT RESEARCH ON

SUPPLIERDEVELOPMENTSTRATEGIESANDOUTCOMES
DEFININGSUPPLIERDEVELOPMENT
Companies now know that suppliers of critical goods and services can provide major competitive
benefits, in the form of lower costs, improved quality, on-time delivery, technological innovation,
and customer service. As firms seek to globalize their businesses, they must also bring with
them a capable supply base that can likewise support these global initiatives into new markets
and businesses, as well as drive costs out of the supply chain. In our studies, we employed the
following definition:
Supplier development is a bilateral effort by both the buying and supplying organizations to
jointly improve the suppliers performance and/or capabilities in one or more of the following
areas: cost, quality, delivery, time-to-market, technology, managerial capability, financial
viability and environmental.
Inemployingthisdefinition,itisimportanttoidentifythehierarchyofstrategiesthatmustbe
establishedpriortodeploymentofthesepractices.AsshowninFigure1,firmsoftenbeginthe
process of continuous improvement through extensive internal training programs to educate
companyandpurchasingpersonnelinbasicTQMprinciples. Trainingisoftencarriedoutby
quality department managers, using two to three day seminars on continuous improvement,
customersatisfaction,basicstatisticsandprocesscapability.Theseinitiativeslatermatureintoa
focusonthegoalofassessingsupplierperformance.Organizationsatthislevelrealizedthatin
order to improve material quality and performance, a history of supplier performance is
necessaryforfutureeffectivedecisionmakingandsourcingstrategyformulation.Keymeasures
of quality include percent acceptable vs. rejected lots, parts per million defective, warranty
percentages, reliability, process capability ratios, percent parts rejected, and internal/external
customer satisfaction. Practices also included developing a cooperative approach to setting
specifications, listing of "problem" suppliers, definition of target quality levels, employing
commonmeasurementsystemsacrossstrategicbusinessunits,andprequalifyingsuppliers.
Onceassessed,companiesoftenfocusedonconsolidationofvolumeswithfewersuppliers,in
ordertoeliminatethosesuppliersincapableofmeetingexpectations.Supplierdatabasesoften
pinpointedthosesuppliersconsistentlyunabletoperform,resultinginfewersuppliersgetting
more of the business. This first cut of reducing the supply base is often fairly easy to
implement, as nonperformance is easy to identify once an assessment system is in place.
Almostallofthecompanieswhorespondedhavealreadygonethroughseveralroundsofsupply
basereduction,andareclosinginonoptimizingtheirsupplybasetoanappropriatenumberof
suppliers.Manyofthesepracticeswereimplementedduringthe1980sandearly1990s.
The focus of this report is therefore targets those organizations seeking to improve the
performanceofthosesuppliersremaininginanoptimizedsupplybase.

Resultsfromalargescalesurveyofover500supplierdevelopmenteffortsbyKrause(1994)
indicates that respondents found that supplier development results (measured as supplier
performancebeforethedevelopmenteffortversusafter)included:
reductionsinincomingdefectsby6.2%
improvementinontimedeliveryby21%
reductionsinordertodeliverycycletimeby12days
improvementinordersreceivedcompleteby8%.
However,results(showninFigure3)alsosuggestedthatnotallofthebuyerssurveyedwere
satisfied withthe outcomes oftheir supplier development efforts. Moreover, some supplier
development efforts actually resulted in deterioration in the level of satisfaction. This was
particularlytruewithrespecttosupplierperformanceinproductinnovationandabilitytoreduce
totalcost.ASupplierDevelopmentmanageratChryslernotedthat:
Somesuppliersdonotrespondaftermultipleinterventions.Eventhoughtheyare
sayingtherightthings,nothinghappens. Involvementwithsuppliersspans
between 6 months and 1.5 years on average. 80% of the time, there are
significantperformanceimprovements.In20%ofthecases,therearenone.)

STRATEGIC VERSUS REACTIVE APPROACHES TO SUPPLIER

DEVELOPMENT
In1996,anotherresearcheffortwasinitiatedthroughtheGlobalProcurementandSupplyChain
BenchmarkingInitiative,focusingonsupplierdevelopmentbestpractices.Thisresearchstudied
5

writtenresponsesfrom84companiestoquestionsregardingsupplierdevelopmentpractices,as
wellasresponsestoasurvey.

AsshowninFigure4,companiesemployedadiversesetofsupplierdevelopmentstrategies.
Moreover,theseapproaches canbeclassifiedintosupplierspecific improvement projects,or
effortstoimprovethecapabilitiesoftheentiresupplybase.Further,initiativeseitherfocusedon
productlevelorprocesslevelimprovements.
Companiesreportinginthestudywereclassifiedasbelonginginoneoftwocategories:those
firmsfocusingon StrategicSupplierDevelopment,or ReactiveSupplierDevelopment. The
former group of companies (n=50) were focused on actively concentrating their efforts on
improving the longterm capabilities of suppliers of the most important commodities, while
companieswithreactivesupplierdevelopmentstrategies(n=34)adoptedanadhocresponseto
eliminatingsupplierdeficiencies.
AscanbeseeninFigure5,companiesemployingastrategicapproachtosupplierdevelopment
oftenfocusedonimprovingcapabilitiesoftheentiresupplybase,andthenfunneledthese
effortsintosupplierspecificimprovements. Ontheotherhand,reactivecompaniestypically
reactedtomajordeficienciesthataroseasaresultofacrisissituation,(describedbyone
managerasaburningplatform!)

Figure 6shows some oftheother major differences between reactive and strategic supplier
development approaches. Moreover, strategic supplier development approaches focus on
allocatingresourcesforsupplierimprovement,withanobjectiveofcontinuouslyimprovingthe
supplybaseinthelongterm.Thisprocessisundertakenbyanexecutivelevelassessmentof
critical commodities and suppliers, followed by a focused improvement carried out by a
commodityordevelopmentteam.

Respondentswereasked(usinganopenendedquestion)toidentifythefivemostimportant
circumstances, events, or requirements that would be classified as drivers for supplier
development. Figure 7 shows the percent of respondents within a specific classification
(strategicorreactive)thatidentifiedtheassociateddriver. Forexample,16ofthe50firms
classifiedasstrategicidentifiedthegoalofdevelopingastrategicpartnershipasakeydriverof
theirdevelopmentefforts.TheDiffcolumnrepresentsthedifferencebetweenthetwogroups.
Figure7COMPETITIVEPRIORITIES
Driver
StrategicPartnership
Technology
AmountorCriticalityofBusiness
Standardization
Price/Cost
LeadTime/Delivery/ProcessReduction
CompetitiveAdvantage
Minority/SmallSupplierDevelopment
Volume/Quantity/Capacity
Quality
SupplierService/Support
CustomerService/Feedback

Strategic
(n=50)
32%
34%
10%
4%
64%
34%
2%
6%
10%
62%
6%
14%

Reactive
(n=34)
15%
24%
3%
3%
65%
35%
3%
9%
18%
79%
24%
38%

Diff.
17%
10%
7%
1%
1%
1%
1%
3%
8%
17%
18%
24%

Byexaminingtheupperandlowerquartilesofthedifferencesbetweenstrategicandreactivecompanies
keydrivers(shadedareas),thedifferencesinthefocusoftheirdevelopmenteffortsemerge. Firms

employingastrategicapproachtodevelopmentaremorelikelytobedrivenbytheproactive
need for strategic partnering, technology development, and a focused effort to improve
performance ofhighvolumecritical commodities thathaveamajorimpact onthebusiness.
Reactivefirmsaremorelikelytobeapplyingremedialapproachesforsuppliersthatrepresent
animmediatecrisisorburningplatform.
Figure8SCOPEOFSUPPLIERDEVELOPMENTSTRATEGIES
Number of suppliers currently involved
developmentprograms
0to5
6to10
11to15
16to20
21to25
26to30
31to50
50andup

Strategic
(n=47)
10.6%
8.5%
6.4%
6.4%
10.6%
4.3%
8.5%
44.7%

Reactive
(n=34)
17.6%
8.8%
17.6%
0.0%
8.8%
11.9%
8.8%
26.5%

Diff.
7.0%
0.3%
11.2%
6.4%
1.8%
7.6%
0.3%
18.2%

Total

100%

100%

Respondents alsoidentified thetotal numberofsuppliers currently involvedindevelopment

programsbychoosingthecategorythatbestdescribedtheirsituation.Figure8indicatesthat
strategiccompaniesbecameinvolvedinthedevelopmentofawidersegmentofthesupplybase,
(inamajorityofcases,fiftyormoresuppliers.) Reactivecompaniesgenerallyfocusedona
smallergroupofsuppliers.Thesesummarystatisticsleadustobelievethatreactivecompanies
areinsomecasesstillintheprocessofrightsizingtheirsupplybase,ineliminatingpoorly
performingsuppliers.
AmanageratChryslernotedthefollowing:
SupplierDevelopmenthasbeentalkedaboutforanumberofyearsatChrysler,
butinmyopinion,thiswaslargelylipservice.Onlyrecentlyhasthecompany
actuallyimplementeddevelopmentasaformalactivity. Uptonow,8090%of
supplier development has been reactive in nature, and 1020% strategic.
Chryslersobjectiveisto reversethisratio,sothat60%isstrategicand40%
reactive.Thiscanbeachievedbyanticipating(proactively)problemsbeforethey
occurbygettinginvolvedinAdvancedQualityProcessesearlyinthenewproduct
developmentcycle.

STRATEGICSUPPLIERDEVELOPMENTPROCESS
Asnotedearlier,theprimarydifferentiatorbetweenthestrategicandreactiveapproachisafocus
onidentifyingcriticalcommoditiesandsuppliersrequiringdevelopment,withthedriverbeinga
strategicintenttoimprovetheoverallperformanceofthesupplybase. Thefollowingsection
describes the process model that we developed to describe activities used by leading edge
companiesindeployingaproactive,strategicapproachtosupplierdevelopment.

IntheprocessshowninFigure9,wedifferentiatebetweenexecutivelevelandcommodityteam
leveldecisions.Theinitialstepsintheprocess(Steps1and2)aretypicallycarriedoutbyan
executivelevelteam,andareoftendrivenbyacorporatelevelprocurement/supplystrategic
plan.Theremainingsteps,involvingspecificcommodityandsupplierdevelopmentapproaches,
aretypicallyformulated,implemented,andmonitoredbyacrossfunctionalcommodityteam,
andofteninvolvededicatedsupplierdevelopmentpersonnel. Forfurtherdetailsonthesteps
involvedinthisprocess,refertotheGEBNSupplierDevelopmentModuleReport

RESULTSOFSTRATEGICSUPPLIERDEVELOPMENTPROCESS
Onceadevelopmentprojecthasbeeninitiated,progressmustbemonitoredandtrackedover
time.Moreover,anongoingexchangeofinformationisneededtomaintainmomentumofsuch
projects.Thiscanbeachievedbycreatingvisiblemilestonesforobjectives,updatingprogress,
andinturncreatingneworrevisedobjectivesbasedonprogresstodate.Projectplanningmay
require modifications to the original plan, additional resources, information, or priorities
dependingonevents.
Bothstrategicandreactivefirmsusedformalsuppliercertification/supplierrecognitionprograms
intheirdevelopmentefforts.Approximately69%ofthestrategicfirmsand73%ofthereactive
firmsuseformalsuppliercertification/supplierrecognitionprograms. However,theresultsin
Figure 10 show that strategic companies achieved higher performance relative to prior
performance levels for their most successful development initiative, and werebetter able to

10

identifysuppliersrequiringimprovementinareassuchascycletime,quality,totalcost,delivery,
customerservices,responsiveness,andotherareas.
Notethatinallcasesstrategicfirmsmoreachieveawiderrangeofbenefitsmorefrequentlythan
reactivefirms.Thismayindicatethatstrategicfirmsarefocusingdevelopmenteffortsacrossthe
supplybaseandarebetteratactivelyidentifying,withsupplierinvolvement,alloftheissuesthat
needtobeaddressedusingasystematicapproach.

11

Figure10SUPPLIERPERFORMANCE
PerformanceArea

Strategic
(n=50)
Orderfulfillmentcycletime
74%
Inventoryturns
66%
Inventoryobsolescence
50%
Logisticsperformance
56%
Processproductivity
62%
Newproduct/process/servicedevelopmenttime 64%
Quality
90%
Product/servicecost
88%
Employeesatisfaction
38%
Ontimedeliveryperformance
84%
Totalsupplychaincosts
68%
Customersatisfaction
64%
Technologycontinuity
44%

Reactive
(n=34)
50%
47%
32%
38%
44%
47%
76%
74%
24%
71%
56%
53%
35%

Diff.
24%
19%
18%
18%
18%
17%
14%
14%
14%
13%
12%
11%
9%

Leadingcompanieshavesuccessfullymaintainedmomentumthroughavarietyofmechanisms,
including supplier participation on supplier councils, internal and external newsletters, and
communicationofkeyresultsviasupplierperformancereports.

HARDRESULTS
Thereportingofspecificresultsofsupplierdevelopmentinitiativeswassomewhatlimited,due
tothebroadscopeoftheseactivitiesandthedifficultyofidentifyingspecificimprovements
associateddevelopment.Thefollowingsetsofhardresultswerereported:
Quality

90%reductionindefectsin3years
30%improvementinincomingacceptanceratinginoneyear
4%improvementinmeetingspecifications
30%Scrapreduction
Cpkimprovementfrom.65to>1.00
80%to90%improvementofPPMdefective
Improvementinqualityratingfrom99.72%to99.84%in4years
100%avoidanceofprocessshutdowns
24,000PPMreducedto2700PPM

12

Delivery

7%Stockavailabilityimprovement
100%ontimedelivery(severalcompanies)
94%oflineitemsfilledwithinleadtime
26%%improvementofontimedelivery
6%ontimedeliveryimprovement
15%improvementofontimedelivery

Cost

$3millionin6months
10%reductioninpriceandfreightcost
$1millionto$2millioncostavoidance
16%reductioninpreviouspurchaseprices
5%price/productivityimprovement
8%improvementintotalcost
35%improvementinpriceperunit
11.4%costsavingsperyear
10%costreduction

ProcessTechnology
10%improvementinoperationalterms
30%improvementinconcepttocustomercycletimeoverindustryaverage

CycleTime
28daysofinventoryreduced(30to2days)
41%improvementincycletime(110daysto65days)
30%83%leadtimereduction

SOFTRESULTS
Additionally,companiesreportedanumberofnonmeasurablesoftresultsoccurringdueto
supplierdevelopmentinitiatives:
CommunicationandRelationships
Growingalertness/awarenessonqualityandconsistencyinthesuppliersorganization. In
somecases,havedevelopedasystemwithearlywarningonqualitydeviations.

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 Faster,quickerdecisionmaking
Improvedcommunicationwithotherinternalfunctions
Awarenessofbusinessobjectives,andmoretrustandacceptanceofresponsibilitytodelivery
newbusinessprocesses
Supplierclearlyunderstandthebusinessandhowtheirproductsareused,aswellastheir
impactonourprocesses
Loyaltybetweenpartners
Establishmentofstrategicalliancesresultinginmutualgainsformutualbenefits
Suppliersseeabenefitinhavingagroupthatishelpingthemimprove.
Relationshipsimprovewhichhelpsingainingquickeragreementondirectionandspeeding
implementation
Processunderstandingbybothprograms
Delivery
Globalization
Supplierexpandingfrombeingalocalsupplierinoneregiontoaglobalsupplierwithasales
increaseof57%
Productivity
Bettercontributionofmanufacturingresourcespermanhour
Reductioninmanpowerrequirements
Lessthan50%ofinternalresourcesrequiredcomparedto5yearsago
Environment/Safety
Improvedsafetyperformanceonsite
Improved environmental compliance, avoidance of fines, and reduction of hazardous
materialsstorage
Reductionoflosttimeinjuries
Reductioninhazardouswastedisposal
NewProductDevelopment
Increasednumberofsupplierideasandsuggestions
Improvednewproductlaunch
Technologysharing
CustomerSatisfaction
Improvedcustomersatisfaction
Improved communication between supplier andfield personnel that actually use the end
product,leadingtoabetterunderstandingofactualprocessesandapplicationofservice/
material
Improvedrelationsbetweenbuyersplantsandsellerscustomers

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 Enhanced synergy between engineering and procurement groups at both customer and
supplier,benefitsoftransferredresources
Goodpublicrelations
SupplyChainManagement
Managementofsecondtiersuppliersincreasedsubstantially
Justintimedeliverybylocalwarehousingandsupplierpersonneltocompanylocation
GreatersupplieruseandnumberofordersreleasedviaEDI
Improvedrailcarmanagement
Improvedinformationsharing
Improvedproductavailability
Morestablesupply
Improvedplanningandforecastingandsupplychainintegration
Reductionofinventorybuybackandsurplusinventory
Reducedcontractmanagementandimprovedlogisticsprocesses
Significantinventoryreductionsandsavingsintotalcostofgoods
Greater participation in information systems designed to reduce internal processes and
handlingcostsofpurchaseorders
Evolutionofdeliveryfromnorealwindowtoaspecificday
Reducednumberofincominginspections
Reductionofdeliverydelays
.

CAPS GLOBAL SUPPLIER DEVELOPMENT STUDY (1997)

In1997,anotherresearcheffortwascarriedoutbyRobertHandfieldandDanielKrause,and
fundedbytheCenterforAdvancedPurchasingStudies(CAPS)andtheCenterforInternational
BusinessEducationResearch(CIBER).Theprimarythrustofthisstudywastocomparebuying
firms supplier development efforts across countries and across industries. Specifically, the
researchsoughttocomparebuyingfirmssupplierdevelopmenteffortsintheU.S.tobuying
firmssupplierdevelopmenteffortsintheU.K.,Japan,andSouthKorea,intheautomotiveand
electronicsindustries.
Thisinternationalresearchwasdrivenbytheneedtobetterunderstandsupplierdevelopmentina
globalcontext. Withtheadventofthisglobalera,therallyingcryoforganizationshasnow
become: Tocompeteglobally,buyglobally! Acommontermthatisusedtoreflectthis
changeis localization. Localizationreferstothecapabilityofanorganizationtoidentifyand
developasupplybaseinthemarketswhereitsellsand/orproduces.Thisstrategyisemployed
foranumberofreasons,suchasthefollowing:
Costoftransportationprohibitsimportingfromcurrentsupplybaseinhomecountry.
GovernmentregulationsintheTriadregions(NAFTA,EC,andAFTA)requirehigherlevels
ofdomesticcontent.
15

 Companiesneedtocapturesuperiorsuppliercapabilitiesintheareasofcost,quality,speed,
ortechnologyregardlessofwherethesupplierislocated.
Theneedtoconfigureproductsorservicestomeetlocalcustomerneeds.
Whateverthereason,manyorganizationsareseekingtodevelopagloballyalignedworldclass
supplybasethatenablesnotonlylocalizationofproductorservicerequirements,butthatcan
createacompetitiveadvantageintermsofcost,quality,deliveryandtechnology.
Unfortunately, a great number of barriers lie in store for the purchasing executive seeking to deploy a
global supplier development initiative. While many of the processes for developing a local supply base
are well-documented, the processes required to deploy this strategy in a global environment are often not
well-understood. In order to provide insights into the specific processes used by organizations to develop
a world-class supply base, the researchers carried out a set of twenty-five case studies in the U.S., Korea,
Japan, and the United Kingdom, followed by a survey of U.S. buying firms. The focus of the research
was on the following question: What are firms in the U.S., U.K., Japan, and South Korea, in the
automotive and electronics industries doing to effectively improve their suppliers performance to world
class levels? These industries were chosen because they are generally characterized by high rates of
competition, high rates of technological change and high levels of reliance on suppliers. The firms
participating in this research are shown in Figure 11.

Figure 11 Firms Participating in the CAPS Research

Automotive:
BMW(U.S.)
ChryslerCorporation(U.S.)
Daewoo(Korea)
HondaofAmerica(U.S.)
HondaMotorCorporation(Japan)
Hyundai(Korea)
Isuzu(Japan)
Kikuchi(Japan)
Kia(Korea)
LeanEnterpriseResearchCenter(U.K.)
Nissan(Japan)
PlasticsEngineering(U.K.)
PrinceCorporation(U.S.)
RollsRoyce(U.K.)
Rover(U.K.)
Unipart(U.K.)
VarityPerkins(U.K.)
WelshDevelopmentAgency(U.K.)

Electronics:
HewlettPackard(Scotland)
Hitachi(Japan)
IBM(U.S./U.K.)
Intel(U.S.)
LG(Korea)
NCR(U.S.)
NEC(Japan)
Samsung(Korea)
Siemens(Korea)
Solectron(U.S./U.K.)
Sony(Japan)
ScottishEnterprises(U.K.)
SunMicrosystems(U.K.)

IntheCAPSreport,theauthorsprovideaprocessmodelthatcanaidmanagersindevelopingworldclass
suppliersinallcornersoftheworld. Themodelisillustratedwithbestpracticesderivedfromcase
interviews,andissupportedwithadditionalinsightsfromasurveyquestionnaire. Themodelisbroad
enoughtobeappliedtoanyindustry(productorservicerelated),yetmustbeinterpretedandadaptedto
thereadersuniqueindustryandorganizationalcharacteristics.Thedescriptionoftheprocessmodelis

16

followedbythreecasesthatprovidefurtherinsightsintothesupplierdevelopmentprocess.Asummary
oftheresultsfromthisresearchreportisprovidedhere.

OBJECTIVES OF THE RESEARCH

The primary purpose of this study was to investigate supplier development in terms of its use for
companies that are striving to build an integrated and globally-aligned network of suppliers. In
doing so the researchers sought to define the processes companies use to build a globally-aligned
network of suppliers. Some background questions that were used to initiate the study included:
1.Whyissupplierdevelopmentimportant?Whatarethedriversoftheseefforts?Whatis
theultimategoaloffirmssupplierdevelopmentefforts?
2.Howdosupplierdevelopmentinitiativesdifferinvariousinternationalregions?
3.Dosupplierdevelopmenteffortsvarybasedonthegoaloftheeffort?
4.Howdobuyingfirmsandsuppliersbenefitfromsupplierdevelopment?
5.Whatarespecificbarrierstosupplierdevelopmentinaninternationalcontext?
The focus of this research report is a process model that resembles the process being followed, as
a whole, by a group of case study companies striving to build a globally-aligned network of
suppliers. The model is depicted in Figure 12. Certainly not all the case companies had
achieved a globally-aligned network of suppliers. In fact, not a single case company had
successfully completed all of the steps in the process model across their entire supply base.
Some companies had completed the process in selected regions of their supply base. Most of the
interviewees noted that such a network represented the ultimate objective for their organization
as they managed and sought to improve their unique set of suppliers.
Building the supplier development process model required a broad view of the case companies
practices and a clear idea of which companies were best at accomplishing a particular step within
the model. This report incorporates descriptions of companies best practices to illustrate the
specific steps in the model. While the researchers would remind the reader that no single
company had successfully negotiated every step in the model provided in Figure 11, many of the
companies expressed a similar statement of where their supplier development activities must
culminate: a globally aligned supply base.
KEY FINDINGS
Before purchasing organizations become involved in supplier development, other supply base
management practices such as supplier evaluation and supply base rationalization should already
have been deployed. In addition, the company should be able to demonstrate effective internal
processes and capabilities. Asking suppliers to adopt practices and techniques that the buying
firm itself has not adopted will only result in a loss of credibility with suppliers.
ThemodelinFigure12depictsthefourmajorstagesindevelopingagloballyalignedsupplier
network.Thefourstagesincorporateanumberofintermediatesteps:

17

Step1:IdentifyStrategicSupplyChainNeeds.Thefirststepinvolvestheidentificationofa
needforimprovedsupplierperformance.Thisneedshouldbeexplicitlyidentifiedandaligned
withendcustomerrequirementsandnewproductdevelopmenttargets.Suchneedsaredrivenby
customersproductspecificdemands inareas suchascost,quality,delivery,technologyand
similarobjectives,andbroaderneedsintheareasofcompetitivepriorities,globalcompetition,
andsupplybasedeficiencies.Itisimportantthatcrossfunctionalexecutiveinputoccursatthis
stageoftheprocess,sincetheobjectivehereistoidentifytheoverallbusinessneedsintermsof
costreductiongoals,technologyroadmaps,globalmarketexpansionplan,andsoon.

18

FIGURE 12 SUPPLIER DEVELOPMENT MODEL

Increasing
Integration
10. Supplier Integration in
New Product/Process
Development

Proactive
Development

SupplierDevelopment

Integrative
Development

8b.Incentives
&Rewards

7.EstablishOpenRelationship
8.Systematic
throughFeedbackand
Supplier
InformationSharing
Development

5.OnsiteRisk
AssessmentbyCross
functionalTeam

1.Identify
2.Searchfor
Strategic
CompetitiveSuppliers
SupplyChainNeeds

CriticalSuccessFactors:

8a.Direct
Involvement

GOAL:
Self-Reliant Supply
Base Continuous
Improvement

9.Maintain
Momentum

Activities

8c.Warnings
&Penalties

Problem
Solving
Development

Identify,
Assess&
Rationalize
theSupply
Base

GOAL:
Globally Aligned
Supplier Network

11.EstablishPerformance 12.Establish
ImprovementinSecond IntegratedSupplier
TierSuppliers
Network

GOAL:

6.ProblemsolvingtoEliminate
SuppliersDeficiencies
(Reactive)

3.EstablishPerformance
MetricsandAssess
Suppliers

GlobalPerspective
TopManagementSupport
CrossfunctionalSupport

19

Suppliers Meet
Current
Production
Requirements

GOAL:
4.SupplyBase
Rationalization

Pool of Potentially
Capable Suppliers

GlobalInformationSystems
TQMProcessFocus

Increasing Benefits
Over Time

Step2:SearchforCompetitiveSuppliers.Thisstageinvolvesaworldwidesearchfor
competitivesuppliersbasedonthecriteriaestablishedinStep1.Onceatargetedglobal
regionisidentified,afocusedsearchintheregionofinterestiscarriedout.Thistargeted
searchisoftenfacilitatedandcarriedoutinconjunctionwithlocalgovernmentagencies
and/orpartnerswithintheregion.
Step3:EstablishPerformanceMetricsandAssessSuppliers. Companiestypically
established a performance measurement system to assess and track suppliers
performanceoveranextendedperiod. Ideally,thisperformancemeasurementsystem
shouldberealtime,andprovideimmediatefeedbacktothesupplier.
Step 4:SupplyBaseRationalization. As afunction ofthesearchandassessment,
suppliersthatareclearlynotcapableofmeetingthecompanysneedsareeliminatedand
thesupplybaseisoptimized.Theoutcomeofthisstrategyisapoolofsuppliersthatare
potentially capable of meeting the purchasing organizations need for products and
services.
Step5:OnsiteRiskAssessmentbyCrossfunctionalTeam.Step5representsthefirst
stepinaseriesoftruesupplierdevelopmentprocesses.Onceapoolofsuppliershas
beenidentified,performancemetricsareestablishedinthefollowingareas:cost,quality,
delivery, cycle time, product and process technology, engineering capabilities and
managementskills.Adetailedriskassessmentofsuppliersbyacrossfunctionalteamof
specialistsisperformed. Thisteamshouldspendseveraldayswitheachsupplier,and
shouldnotesuppliersdeficiencies,weaknessesaswellastheirstrengths.
Step 6: ProblemSolving to Eliminate Suppliers Deficiencies. This step involves
remedial action to correct suppliers deficiencies. In effect, this brings suppliers
performanceuptoaminimumleveltobeabletoservethefirmasasupplier.Onceall
immediateproblemsareresolved,theoutcomeisasupplybasethatiscapableofmeeting
currentrequirements.Insomecasessuppliersaredeficient,butthedeficiencydoesnot
interferewithimmediateproductionrequirements. Forexample,asuppliermaylack
effectivemeasures,lackengineeringcapability,orhaveprocessinefficiencies. These
problemsarenotedandtargetedforimprovementonalongertermhorizon.
Step7:EstablishOpenRelationshipthroughFeedbackandInformationSharing.
Thisstepprecedesproactivedevelopmentofthesupplierscapabilitiesandisinitiatedby
establishinganopendialoguewiththesupplierstopmanagement. Itisherethatthe
FutureActionRequireditems(fromStep5)arerevisitedandbroughttomanagements
attention.
Step8:SystematicSupplierDevelopmentthroughtheuseofDirectInvolvement
Activities; Incentives & Rewards, and Warnings & Penalties. Techniques for
supplierimprovement projects may include Kaizen Breakthroughs, process mapping,
inventory reductions, training, total preventive maintenance, and other joint projects.
20

Thesetechniquesarecomplementedbytheuseofawardprogramsandincreasedbusiness
for the best suppliers, which serve as incentives for improved performance. Other
techniques include introducing competition for the companys business and taking
businessawayfrompoorperformers.
Itshouldbenotedatthisstepthatadifferentcombinationofapproachesmayneedtobe
adopted,dependingonthespecificsetofcircumstanceswithanygivensupplier.Thisis
particularlytruewhendealingwithglobalsuppliersindifferentpartsoftheworld.The
samesuppliermayhaveaverydifferentsetofissuesataUSplantversusaGermanyor
Japaneseplant,requiringacompletelydifferentapproach.Thiswasemphasizedbyone
managerweinterviewedatBMW:
InthecaseofBMWintheUS,averydifferentapproachwasrequired.
In Germany, the plants are established, and they have a group of
supplierswhohaveagivenlevelofunderstandingwithrespecttowhatwe
want. Here,however,communicationwithdomesticsuppliersrequires
sharingand ahands on support attitude We have tospend time
askingthemWhatisyourcorrectiveactionplan,andwewillcheckon
youfromtimetotimeWeneedtosuggestpossiblewaystoputsolutions
inplaceWhichactionsaremorebeneficialinastartupphase?
AtHonda,asimilarissuewasnotedbyonemanagerweinterviewedinJapan:

Unfortunately, there are very few cases of truly global suppliers. For
instance, R&D is very efficient in Japanese suppliers, but these same
suppliers may not be effective at R&D in a different location. Thus, it is
very seldom that they find a supplier that can supply multiple locations,
yet locating these suppliers is one of Hondas most important development
strategies. Finding good suppliers to serve both the US and Japan is not
a problem: few suppliers, however, have truly global capabilities.

Step 9: Maintain Momentum. Appropriate incentives for improvement should be

developed, in order to ensure that the improvement effort is not limited to a single
process.Thesuppliermustbeencouragedtomaintainamomentumforimprovementand
tomakecontinuousimprovementapartofthecompanyphilosophy.Theoutcomeofa
successful development strategy is a selfreliant supplier that can initiate their own
improvement projects based on performance feedback from the focal purchasing
organization.
Step10:SupplierIntegrationinNewProduct/ProcessDevelopment. Development
continues with the integration of suppliers into the purchasing organizations supply
21

chain network. This process may begin as the supplier provides input into the
developmentofnewproducts,processes,andservicesthroughmechanismssuchasco
location,guestengineers,andsharingoftechnologyroadmaps.
Step11:EstablishPerformanceImprovementinSecondTierSuppliers.Asanon
going dialogue between the two organizations develops, mapping of the extended
enterprise should include an assessment and potential development of second tier
suppliers,thatis,thesupplierstofirsttiersuppliers.
Step12:EstablishIntegratedSupplierNetwork. Overtime,thefocalsupplierwill
becomepartoftheorganizationsglobalsuppliernetwork,andmayberesponsiblefor
supplyingmultiplegloballocationsandparticipateinglobalgrowthopportunities. As
moresuppliersachievethiscapability,thefinalobjectiveistoachieveagloballyaligned
supplier network. It should be noted that even the most advanced organizations
interviewedinthisstudyhadyettoachievethislevelofintegration.Thus,thisobjective
remainsasabenchmarkfororganizationstostriveforinthefuture.
Thelatterisahighlychallenginggoal.Someofthechallengesnotedbyamanagerat
Hondainclude:

How much has Honda done to challenge the mother supplier to transfer technology
to its children?
How to get the mother company to communicate value analysis and cost reduction
ideas to their children?
How to enable the global network to communicate cost reduction opportunities, yet
not use them exclusively to their advantage when they do so?
How to get Honda associates to force their local supplier to go back to the mother
company and get help from a guest engineer or other form of expertise?

Someofthecriticalissuestoconsiderinmakingthishappeninclude:

Intensive negotiation and joint understanding and commitment at the top

management level in the supplier
Participation by top management within Honda
A common investment for multiple locations, (e.g. Siemens supplies airbag control
units to Hondas plants in both the Europe and the US, in order to minimize the
investment in tooling. However, the control units are actually produced by the
suppliers Mexican plant! Since the units are small, they can easily be shipped to
both the US and Europe
Emphasizing competition. If a supplier already provides Honda with parts in, say,
the US, they certainly have a leg up over other suppliers in being considered for
supplying Hondas new facility. This is because they already know what our
expectations are.

22

Honda places great value on a suppliers ability to improve. If a supplier experiences

defects, but immediately takes countermeasures to prevent it from happening again,
this is considered a plus by Honda.

We conclude with a final metaphor shared by a Japanese manager regarding the

importanceofsupplierdevelopmentinHondascompetitivestrategy:
Every new product cycle is like a 110 meter hurdle race. The hurdles are
the same for all of the racers, yet some are able to master them better than
others. They include things such as quality problems, lack of trust, cycle
time, FMEAs, customer requirements, new technology, etc. The finish line
represents the product release. In every race, there is always a winner!
The winner ultimately captures market share, profits, satisfied customers,
etc. Generally, the winner is the one who is able to leap (e.g. manage) all
of the hurdles and run (e.g. deploy) the strategy quickest. However, once
the race is over, the racers continue to jog around the track getting ready
for the next 110 meter race, which represents another chance to win!
Although you did not win this time around, by the time you go around the
track again, next time you may be a contender! One way of positioning
supplier development is to understand what are the best practices at
each of the hurdles that can turn contenders into winners. As the race
continues, priorities will shift according to the nature of the hurdle.

RESULTS OF SUPPLIER DEVELOPMENT

The results of supplier development initiatives, while often difficult to identify and
define, vary in scope and degree of success. Results can be largely defined into three
separate categories: improvements in suppliers performance and capabilities,
improvements to the relationship between the buying company and the supplier, and
improvements in the buying firms competency in managing suppliers. Some of the
results reported by companies surveyed in the U.S. are shown in Figure 13.
Figure 13: DEGREE OF IMPROVEMENT ATTRIBUTABLE TO THE FIRMS
SUPPLIER DEVELOPMENT EFFORT
AreaofImprovement
Ordercycletime(fromorderplacementwithsuppliertoreceiptofitem).
Quality(reductioninPPM,warrantyreturns,andsoon).
Ontimedelivery(abilityofsuppliertodeliverwithinthebuyingcompanys

Estimated
Improvement
19%
24%
39%

specifieddeliverywindow).
Percentagepricechangeforthisitem(fromthissupplier).
Sharedpricereduction(costsavingssharedwiththissupplier).
Newproductdevelopmenttime(fromconcepttovolumeproduction).
Accesstonewtechnologies.

3%
7%
19%
15%

Percent

23

APPENDIX
THREEBESTPRACTICESINSUPPLIERDEVELOPMENT
The following cases developed from onsite interviews with automotive companies
illustratesomeofthekeydifferencesinapproachesusedtosupplierdevelopmentby
European, US, andJapanese automotive companies. The three cases include BMW,
Chrysler,andHonda.

BESTCASE1:BMWsApproachtoSupplierDevelopment
SupplierDevelopmentApproaches
TheprimaryfocusatBMWinsupplierdevelopmentisthroughaprogramknownas
ProcessConsulting.ThisprocesswasdevelopedoriginallyinGermany,butrequired
modificationbeforeitcouldbeadoptedinNorthAmerica.Richardmentionedthatthe
revisedapproachismoresuitedtoNorthAmericanconditions,whicharesubstantially
differentthantherelativelywelldevelopedsupplybaseconditionsinGermany.
Major Differences between German and North American Supplier Development
Approaches
The Process Consulting approach involves analyzing and telling suppliers what is
wrongwiththeirprocess.Thisworkswellinmaturesupplierenvironments,wherethe
supplier really understands whatthe customer wants. Becausethe customer andthe
supplierhaveworkedtogetheroveranumberofyears,atypeofsixthsensedevelops,
whereinthesupplierintuitivelyunderstandsthecustomersproblems,whichprecludes
thecustomerfromhavingtoexplaintheirdetailedexpectations. (Ihavenotedthisin
welldevelopedrelationships,whereasuppliercanalmostpredictwhatthecustomers
objectionswillbe).
ThefollowingisadirectsetofquotesfromRichardBourne,asbestasIcanrecollect:
InthecaseofBMWintheUS,averydifferentapproachwasrequired.InGermany,the
plantsareestablished,andtheyhaveagroupofsupplierswhohaveagivenlevelof
understanding with respect to what we want. Here, however, communication with
domesticsuppliersrequiressharingandahandsonsupportattitudeWehavetospend
timeaskingthemWhatisyourcorrectiveactionplan,andwewillcheckonyoufrom
timetotimeWeneedtosuggestpossiblewaystoputsolutionsinplaceWhichactions
aremorebeneficialinastartupphase.?

24

TheStateofSouthCarolinaprovideduswithagoodinitialtrainingprogram. (Ref:
HandfieldcangetdetailsfromColumbia,SC)Thiswasagoodinitialjoboftraining
theydidscreeningandsomeinitialtrainingwithrespecttowhatitmightbeliketowork
inanautomotiveindustryenvironment,buttoreallydoitmeansthatyouneedpeople
whounderstandprocessesandwhomakeimprovements,andwhoalsounderstandthe
consequencesofmistakes(i.e.otherthingsgowronglaterintheprocess!)
When we came here, the management teams at the new plant underestimated what
supportwasneeded,andalsounderestimatedwhatourqualityrequirementswouldbe.
Asaresult,wewereunpreparedtofocusourattentiononBMWsqualitystandards.The
supplybasereallydidnotunderstandwhatwouldberequiredofthem.Thisresultedina
numberofstrainedrelationshipswithoursupplybase. Consequently,weendedup
spendingalotoftimecommunicatingandshowingthemwhatwasneeded.Thisalsoled
toamajorefforttogetbuyinfromthesesuppliers.
ThemajordifferencebetweenourapproachandthatusedinGermanywasthatwecould
notsimplyactasapropfortheirimprovement,butthechallengewastogetthemtosee
itasatwowaystreet. Inmanycases,theyneededsupportorneededustomakeit
happenwehadtomakethemunderstandthatitwasnotsimplyamatterofyouneed
supportoryouneedustomakeithappen,butratherthatyourproblemsareour
problems!Youhavegoodproducts,buryouhavetodobetter,andweareheretohelp
you!
Forexample,atypicalobjectiveistobe20%overtheindustryaverage, plusbeatour
competitors.Developmentisthereforeakeyimpetustomakeoursuppliersbetterthan
thecompetition. Oneofthemostimportantwaystoachievethisisto communicate
expectations. We have recently published a document (ref: Supplier Partnership
Manual) which clearly delineates supplier responsibilities, process maps, and all
expectations. Such a manual has also been published for our logistics, quality, and
engineeringfunctions. Moreover,youmustbeabletoclearlycommunicatetopeople
whatyouwant,beforeyoucanexpectitfromthem. Toaidinthisobjective,wealso
regularlygiveseminarsinwhichwepresentourRoadmaptoQuality.
This is made all the more difficult because we are a relatively low volume product
(60,000unitsperyear).Atthetimethatsupplierswerenominated/evaluated,someof
theirprocesseswerebasedonalowvolumeapproach,andwerenotasrobustasour
requirementsdemanded. Asaresultofthecombinedeffectofnewpeople+capital
equipmentproblems+lowvolumeprocesses,theresultwasmany,manyproblems!To
combattheseproblems,weworkedonprocesscapability(Cpks),trainingandcapital
equipmentproblems.
CapitalEquipmentProblems

25

Agoodexampleofthetypeofproblemweencounteredwasasuppliersconveyorwhich
wasconstantlybreakingdown,primarilyduetopoordesign,andatemperaturecontrolled
environmentthatwasexceedingthespecificationlevel.Thesetwoissuesresultsin(1)
shutdowns,and(2)productperformanceproblems.
Inthefirstcase(1),thereactionwaspanic!Aboveallelse,thesuppliersoughttokeep
productiongoing,whichinturnaffectedproblem(2). Weneededtofixproblem(1),
beforeattackingproblem(2).
ResourceAvailability
BMWdoesnotprovidefinancialsupportotherthanowningproductiontoolingatthe
supplierslocation.Wehaveprovidedtheservicesofseveralpeopleoverafewweeks,
andwehavealsoofferedsupplierssupportanytimetheyrequestit. Forexample,we
havesentmaintenanceengineeringpeople,andprocurement/logistics/qualitypeopleas
neededtohelpsuppliers.
Ourcurrentfocusisthatwenolongerhaveproblemdrivenprojects,butarepareto
driveninthelast45monthstoidentifyproblemsandpreventthemfromgettingany
worse.
SupplierCouncil
Ourmajorsuppliershavegottentogether,buttheyarenotformallyrepresented. The
councilismostlyaninformalaffair.Ouradministrationhelps/workswiththemonanad
hocbasis,andwehaveanannualgolfgame,butapartfromthat,thereisnotastrong
councilpresence.
EngineeringFocus
BMWhastraditionallymaintainedaverystrongengineeringfocusinitsorganizational
culture.Thishasresultedinanumberofdifferentapproacheswithintheorganization,
especiallywithregardtotheinterfacebetweensupplierdevelopmentandengineering
personnel.Weencounteredanumberofmajorobstacleswithinmiddlemanagementthat
wehavebeenabletoovercomeovertheyears.
ChallengesBMW
AmajorchallengethatexistsatBMWinvolvesstandardizingexpectationsbetweenhere
(theUS)andMunich,aswellasbetweenpurchasingandquality. BMWSpartanburg
currently has 70 people in Supplier Quality Assurance. Their intention is not have
increaseinspection,buttheyinvariablyrequireinspectionfornewsuppliers.

26

AnimportantlessonlearnedbyBMWisforasupplierwhoisqualifiedandconsidered
excellentinEurope,theirsubsidiaryinNorthAmericamaynotbecapableofmeetingthe
same standards. Globalization involves more than just bringing in equipment and
standardsfromEurope. Moreover,thereareoftenproblemsinenforcingexpectations,
andincreasedtrainingisoftenrequired.
CommunicationProblems
Oneofthebiggestproblemsinvolvedthesurfaceofbumpersandbodypanels,which
oftenhadscratches,etc.Insettingexpectations,itwasimportanttocommunicatethatit
wasnotjustamatterofrightvs.Wrong,butamatterofsettingobjectivecriteria. For
instance,settingthestandardmightinvolvetellingthesuppliertoholdthepartundera
light,andexaminingitatacertainangletolookformarks.Forsupplierstounderstand
theseexpectations,facetofacediscussionsandcommunicationandtrainingarerequired.
(Note: This discrepancy was also confirmed in discussions with a BMW supplier.
Engineers at Prince confirmed that BMW placed a strong emphasis on physical
appearanceofbodyparts,butthatsuchexpectationswerenotclearlycommunicatedin
theblueprintdesign.Moreover,howcanoneexpressphysicalappearances/finishona
blueprint,andhowarewesupposedtounderstandtheirexpectations?)
Themostimportantandprimarytaskwithsuppliersistosetstandardsthateveryone
understandsANDagreesto.Thisisnotsomuchaprobleminelectronics,butinvolvesa
huge problem in bodywork. Because BMW pays a lot of attention to detail, a big
challengeistoreducecostandreduceoverdesign,withtheobjectiveofcompetingwith
thesameproductfromthecustomersperspective,eventhoughitisbuiltintheUS,not
Germany.
SupplierDevelopmentinGermany(Munich)
Many supplier development efforts in Germany were established primarily with the
objectiveofreducingcostasearlyas5yearsago.Lately,however,thefocushasbeen
moreonprocessoptimization,asopposedtocost.(NoterecentBusinessWeekarticles
suggestthatBMWisoutsourcingagreaterproportionofmanufacturingbecauseofthe
costofdoingbusinessinGermanye.g.30hourworkweeks,benefits,etc.) Process
optimizationreferstothepracticeofstabilizingprocessesandreducingpartspermillion
defective,andthemethodstoachievetheseobjectives.
ProcessConsulting
TheprimarytoolappliedinGermanyiscalledProcessConsulting.Processconsulting
involveshavingagroupofBMWengineersvisitaGermanyfacility,andexplaintothe
supplier how to improve their process (e.g. in a consulting role). Because of the
cohesivenessthatexistswithintheGermanyculture,suchrecommendationsareeasily

27

adoptedbysuppliers. Brendaadmitsthatthisisanexcellentsetoftools,butthatthe
mannerofapplyingitintheUShadtobemodifiedsignificantlyfortheUSsupplybase.
BecausemanyoftheUSsupplierswerenotmature,theprocessconsultingconcepthad
tobemodifiedsignificantly. InGermany,themajorityofsuppliersareverymaturein
terms of their process capabilities, and so Process Consulting involved really just
tweakingthesuppliersprocesses. Inaddition,thecohesivenessthatexistsbetween
GermansandthelengthoftherelationshipbetweenBMWanditssuppliersmeantthat
mostsuppliersunderstoodBMWsexpectationsverywell. However,theUSsuppliers
supplyingtheSpartanburgplanthaverelativelynewfacilities,andconsistinmanycases
offewerthan200employees.Thedevelopmentefforthasfocusedonhelpingsupplier
optimizetheirsystems.Akeyconceptinvolveshavingsupplierunderstandwherethey
areintheirgrowthanddevelopmentcurve. Forinstance,manysuppliersneededhelp
initiallyjusttogetproductoutthedoor.Insuchcases,theemphasiswasonsolvingthe
bigproblemsthatmightleadtopartsshortages,beforeattackingthebigproblems.Inthe
firstyearofproduction,suppliersexperiencedsevererampupproblemsinresponseto
theincreasesinproductiondemands.Inthisphaseofdevelopment,BMWweededout
50%ofthesupplybaseifnecessary.Somesuppliershadgonethroughsetupjustafew
monthsbefore,butbecauseoftheirinabilitytorampup,wereshutoutofthesupplybase.
Forexample,onesuppliersetupapaintline,butwasunabletomeetthedifferentsetof
environmental standards imposedbyBMW. Theyhadhiredagroupofpeoplewho
hadntworkedwithpaintprocessesbefore,andsimplyhadnoideaofcleanlinessand
environmentalstandards. Insuchcases,althoughthesupplierhadgoodmethods,they
requiredsignificantamountsofmassagingbeforetheycouldbeusedasasupplier.
BenchmarkingReport
BMWhasrecentlycarriedoutabenchmarkingreportonsupplierdevelopment,which
entailedasetofdetailedinterviewswithToyota,Honda,Chrysler,Rover,andtwoother
TechnicalsupportorganizationsassociatedwithBMW,inordertocompareapproaches.
The primary question involved was: How do other companies go about Supplier
Development?ThiswasdonetoaugmentexistingGermanbenchmarkingstudiesinthis
area.Thefocuswasprimarilyonsupplierdevelopmentprocessesbeingused,asopposed
toperformanceandstrategiclevelbenchmarking.
LessonsLearned

BMWLimitedtimeandresourcesareavailabletodevelopsuppliers
Suppliersneedmorehandsonhelp,andlesstheoreticalhelpinimproving
theirprocesses
HondaBesttoworkprimarilywithfocusedgroups,NOThugeteams
Thisisbecausepeopletendtogetpulledtootheractivities,andlosetrackof
theproject

28

Ahitlistapproach(whereonecomesupwithalistofpeople/processesto
eliminate)isdevastatingoneneedstolistencloselytosuppliers,eveniftheir
concernsarenotdirectlyrelatedtoyourobjective
Onceideasprovideyouwithalistofideas,implementthemASAP
GoinginwithalistofToDosforthemtoimplementsimplydoesntwork
Toyotaspendaconsiderableamountoftimeworkingonthehumanside
Adoptaveryhandsonapproach
Emphasizespendingalotoftimeseekingtopmanagementapprovalatthe
supplier,whereasothersoftendontseeaneed
SupplierDevelopmentoperatesasaseparateorganization
OperateaSupplierSupportInstitute,whichisdistinctfromthepurchasing
department.Thisinstituteisnotjustacostreducerinfact,youdonteven
havetobeadirectsupplierofToyotatoattend,aslongasyouareinthe
Kentuckyregion
ThekeycontactisMr.Ohba,fromKentucky*numberprovidedbyBrenda*
Note:BMWhasanongoingdialoguewithToyota.TheattitudeisIfwhatwedohelps
ourcompetitors,thatisokay,butweexpectoursuppliertoexpandtheirknowledge,
butnottotrainourcompetitorssuppliers.
ChryslerreliesextensivelyontheirAutomotiveIndustryAssociationGroup(AIAG)
program
PrimarytoolfordevelopmentisQS9000usedasabaselinetodetermine
areasrequiringmorework
Primarylessonlearnedisthatdevelopmentpeopleneedprocessexperienceto
commandrespectinworkingwiththesupplybase(nottheoreticalexperience)
Insomecircles,thelevelofhandsonsupportisviewedasdoingsuppliersjobfor
theminreality,thislevelofsupportactuallyinvolvestrainingthesuppliertobecome
selfsufficient. In this respect, supplier development can be very tricky. When our
peopleleave,thesuppliercannotfallapartagain.Weneedtocomebackinsomecases
andhelpthemgetbackontheirfeetagain.

Roververynarrowanddeepapplicationofsupplierdevelopment
Use problemsolving tools to identify improvements. However, they
acknowledgethatthisisnotenoughneedtoidentifyrootcauses
Differentlevelsofunderstandingofproblemsolvingexistwithinthesupply
basethisisbroughtoutespeciallyinKaizenBreakthroughs
NeedtofollowthroughbeyondKBsneedtoensurethatprocesschanges
arestandardized

ComparisonofSupplierDevelopmentAssociates

Average#ofassociatesis2040seniorlevelpeople
29

By function generally more technical/practical people, and fewer theoretical /

consultingtypes
TheIdealDevelopmentPersonis
veryhandsongoodtechnicalskills
goodpeopleskillsandinteraction,(notjustImthecustomerdoasIsay!)
hasabilitytoconvincepeople
Motivatormustbeabletopushpeopletoexceedtheirperceivedcapabilities
Goodprojectmanagementskills
Itiseasytoshowresults,butsuppliersmaybeforcedintoshowingtheseresults,
andtheymaynotcontinueinthelongterm

OtherSummaryDatafromBenchmarkReport
ApproachesusedincludeScore(Chrysler),BP(Honda),POZ(ProcessConsulting
BMW),andToyotaProductionSystem(TPSToyota)
PercentoftimespentonsupplierdevelopmentbyAssociatesrangesfrom30100%
Key measures used to assess supplier development progress includes Cost, PPM,
throughputtime
Key slogan Powered by Honda phrase used for all Honda motors in 1997
appearsonmanydifferentproducts
SupplierInputonApproaches

LikedBMWsapproachgoodcommunication,emphasizedbasics
Hondagoodrecognitionasaresultoftheireffortswereabletoleveragewithother
customers
Fordhaventupdatedtheirtoolsforsometimeveryoutdated

30

BestCase2:SupplierDevelopmentatChrysler
(Note:ThiswaswrittenpriortoChryslersmergerwithDaimler,whenPurchasing
wasundertheleadershipofThomasStallkamp).
ChryslersPurchasingandSourcingStrategy
Chryslerspurchasingandsourcingstrategyisbasedonleveraging theresourcesand
capabilitiesofinternalorganizationsandexternalsupplierstocontinuouslyimpactthe
quality, cost, technology and delivery of Chrysler vehicles for our customers. The
organizationhasevolvedintoonewherecontinuousimprovementhasbecomeawayof
life, and suppliers are considered as integral members of the Chrysler Extended
Enterprise.
SCORE(SupplierCostReductionEffort)isacontinuousimprovementprocessChrysler
utilizes to increase Chrysler/Supplier communications and teamwork. The SCORE
approach enables Chrysler to work more closely with its suppliers in the design,
developmentandproductionofhighquality,costcompetitiveproductstosurpassthe
requirements of its vehicle customers. As a result Chrysler has become the global
benchmarkforsupplierrelationshipsandcostcompetitiveness.
Procurement and Supply centralizes control of commodity and supplier strategies,
policiesandprocedureswhileprovidingfocusedsupporttoChryslersplatformteams.
TherearefiveorganizationsthatreporttotheofficeoftheExecutiveVicePresidentof
ProcurementofSupply:
(1) TheProcurementandSupplyProcessTeamwhichincludes
PlatformSupply
SupplierManagementandSupplierQuality&Development
(2) Supply
(3) SpecialSupplierRelationships
(4) OperationsandStrategy
(5) InternationalProcurement
Major Responsibilities of Each Organization

Platform Supply

CoordinateP&Sactivitiestomeetplatformvariableandinvestmentcostobjectives
Coordinatesupplierqualityactivitiesinsupportofvehiclequalityobjectives
Managevehiclesupplyrisks
Managetooling,equipment,andconstructionprocurement

31

CommunicateplatformrequirementsintoP&Sandcoordinateresourcedeployment
tosupportrequirements

Supplier Quality & Development

Developandimplementmethodsandtoolstoimprovevehiclequalitytocorporate
objectives
Manageadvancequalityplanningandcurrentvehiclequalityproblemidentification
andresolution
Measuresupplierqualityperformancetoobjectives
Minimizequalityrisksonassemblytoolingandequipmentandproductionvehicle
components/systems
Workwithsupplierstoimprovemanufacturingprocessesandresolveprocessissues
Workwithsuppliermanagementtodevelopandimplementsupplierandcommodity
managementstrategies

Supplier Management

Coordinatethedevelopmentandimplementationofsupplierandnewcommodityy
managementstrategies
Managecosts,managesupplierrelationshipsandworkwithengineeringtointroduce
newtechnologies
Leveragesupplierexpertiseacrossplatforms
Encouragesupplierparticipationincontinuousimprovementinitiatives
Managedailysupplierbusinesstransactionactivities
ManageServiceandPartsprocurement

Supply

Developandmanageworldwidesupplynetworktoensurethetimely,costeffective
andqualitydeliveryofmaterialsandfinishedvehiclestocustomers
Establishproductionprogramsandvehiclebuildschedules
Ensurepartsavailabilityforpilot,launchandvolumeproduction
Incooperationwithvehicleplatforms,conductengineeringdevelopmentofmethods
andproceduresfortotalmaterialsmanagement
Developandimplementlogisticssupplierandcommoditymanagementstrategiesand
conductoperationsofChryslerTransport,Inc.

Special Supplier Relations

Identify and develop qualified ethnic minorityowned companies for Chrysler

business

32

DevelopandmonitorSecondTierMinoritySupplierSourcingStrategy
Mentorkeyminoritysuppliers
FacilitatedialoguebetweenChryslersseniormanagementandkeyminoritysuppliers
Participateinregionaltradefairsandinterviewprospectivesuppliers

Operations and Strategy

ManageprocurementofnonproductionsuppliersandservicesforChryslerfacilities
Developandimplementbenchmarkingandtrainingprograms
DevelopandadministerProcurement&Supplypoliciesandprocedures
ConductspecialstrategicstudiestoimproveP&Soperations
Coordinate supplier special events, supplier communications and measurement
activities
CoordinateP&Scontinuousimprovementandvalueengineeringefforts
CoordinateChryslersSCOREprogram

International Procurement

ProvideProcurementsupporttooffshoreassemblyandmanufacturinglocations
IdentifyanddevelopsuppliersinthehostcountrytoprovideforLocalContent
FacilitatetheestablishmentofChryslerskeyNorthAmericanSuppliersinforeign
locations
ProvidealiaisonfunctionbetweenP&SInternationalOperationsandthePlatform
Engineeringteams
Provide Supplier Quality training and guidance to offshore Chrysler locations
includingcertificationofincountryapprovallabs
AssistintheresolutionofpartsshortageissuesassociatedwithInternationalSupply

Comments from Gary Anderson Director of Supplier Development

Gary has a total of 45 years experience working in the automotive industry. This
includes 15 years of experience working with Chrysler, and 15 years prior to that
workingwithAMC.HehasbeenHeadoftheSupplierDevelopmentgroupfor1.5years.
HereportstoCindyHess,whoisheadofSupplierQuality,andalsotothePlatform
SupplyGroup(formerlyheadedbySteveZimmer).ThiswaseffectiveasofMarch1996,
(thelatestiterationofChryslersorganization).TheSupplierQualitygroupconsistsof
SupplierMeasurementandFeedback,QualityProcessImprovement,ProcessSpecialists,
andSupplierDevelopmentandTechnicalAssistance.
Process Specialists The Process Specialists are a group of 1516 individuals, who
specializeinareassuchascastings,machining,etc.Theseindividualsaretypicallyina
reactive mode, in that they respond to quality/delivery issues when measurement
indicators signal that a problem exists. For instance, if a supplier is experiencing
33

persistentprocessproblemsthatareevident,andthenormalsetofcontactscannotresolve
it,thentheprocessspecialistsbecomeinvolved.Insuchcases,theseindividualshavethe
requisiteskillset,giventhattherelationshipispositive(win/win),whichallowsthemto
watchthelineforawhile,talktothesuppliersproductionpeopleandgetanideaofwhat
theactualproblemis.Theythenworkwiththesupplierstechnicalpeopletodetermine
whatiswrongwiththeprocessarriveatconclusionsregardingasolution.Thismaytake
twotothreedays,withsomerepeatvisits(anadditional23times),andtheisolated
processincidentisresolvedrelativelyquickly. Atthatpoint,theymoveontoanother
supplier,andtravelallovertheworldfightingfires.Thistypeofreactivesupplier
developmenthasbeenusedforanumberofyears.
RecentApplicationsofProactiveSupplierDevelopmentSupplierDevelopmenthas
beentalkedaboutforanumberofyearsatChrysler,butinGarysopinion,thiswas
largelylipservice.Onlyrecentlyhasthecompanyactuallyimplementeddevelopment
asaformalactivity.Uptonow,8090%ofsupplierdevelopmenthasbeenreactivein
nature,and1020%proactive.Chryslersobjectiveistoreversethisratio,sothat60%
is proactive and 30% reactive. This can be achieved by anticipating (proactively)
problemsbeforetheyoccurbygettinginvolvedinAdvancedQualityProcessesearlyin
thenewproductdevelopmentcycle. Inthisrespect,theprocessspecialistswouldstill
playarole,butwouldgetinvolvedinprocesschoicedecisionsbeforetheyarecommitted
to,inadvanceofproblems. Thismigration hasstartedtotakeplace. Specialists in
stampings, castings, and machining are looking at process FMEAs and identifying
problemsinnewproductdevelopmentonamoreregularbasis.
CriteriaforSupplierDevelopmentSelectionOntheotherhand,supplierdevelopment
specialists workwith chronic problem suppliers with systemic issues that go beyond
simpleprocessproblems.Thesesuppliersdontjusthaveaproblemwiththeirprocess:
Theyjustdontgetit!Inmostcases,thesesupplierseither:
Choosetoignoretheproblem
Donttaketheproblemseriously
Haveseriousfinancialproblems
Haveseniormanagerswhohavethewrongphilosophy.
Insuchcases,thesesuppliersarechosenforsupplierdevelopmentactivities.Someofthe
othercriteriathatareusedtoinvolveasupplierinclude:
Atleast$1MbusinessayearwithChrysler
Partofsourcingstrategyforatleastthenexttwoyears(partsformodel)
Havebeenidentifiedashavingaseriouspoorqualitytrackrecord(PPM)as
andareferralforassistanceeitherfrommanufacturing,warrantyrecords,or
recentproductlaunchanddeliverydata
Theseproblemshavebeensystemicforatleastthelasttwoyears.
These type of records essentially tell a story regarding the suppliers history of
continuousproblems.Thenormalqualityorganizationisunabletohandleit.Theymay
34

ormaynothavehadaprocessspecialistcomeinalready.Insuchcases,theseindividuals
havebeenunabletodealwiththeproblem,orthespecialisthasrealizedthata more
seriousproblemlaybehindthesupplier.Insuchcases,anongoingdialoguewiththese
suppliers has provided them with many directions for improvement, yet they have
continuallybeenunabletocomply,andcontinuealongadifferentpathwithadifferent
agenda. Insuchcases,thefundamentalquestionisWHY? Whenthisoccurs,Garys
peoplearecalledin.AlthoughtheymayinvolvetheprocessspecialistslateronintheSD
process,thistypeofsituationclearlycallsforadifferentapproach.
Types of Suppliers Who Require Development Interestingly enough, there is no
singlepatternwhenitcomestothetypesofsupplierswhofitintothiscategory.Todate,
Garys group has worked with 35 different suppliers and 45 different manufacturing
locations.Thisgrouphasconsistedoflarge,medium,andsmallsuppliers.Someofthem
areinthetop10intermsofvolume(butproblemsoccurinoneoftheirfacilities),top50,
aswellasTop150. Theyalsospanmultiplecommoditygroups(infact,allofthem!)
Thereissimplynodistinguishablepatternintermsofidentifyingwhichsuppliersare
mostlikelytohavethisproblem!Theonlycommonfeaturelinkingallofthesesuppliers
isthelackofgoodmanagement.
SupplierDevelopmentProcess
1. ThesupplierreceivesalettersignedbythecommoditymanagerandGarythatstates
thatwewanttohelpyoumaintainyourpositionasamajorsupplierforChrysler.
2. Ameetingisheldwiththeseniorexecutive,topmanufacturingmanager,andtop
qualitymanger.Atthismeeting,Chryslerdefineswhywerehere,andemphasize
thattheyseektoworkwithinawin/winenvironment.Theywanttohelpthesupplier
maintaintheirpositionwithChrysler,andthenpresenttheperformanceindicators
(hardfacts)thatexplainwhywearehere(quality,deliveryproblems,etc.)Inmost
situations,thisinitialmeetingiswelcomedwithaccolades;asitisanopportunityfor
freehelp!Theseconversationsareheldinextremeconfidence,andnoonecanuseit
isfuturepricenegotiations,etc.
(Itshouldalsobenotedthatsupplierdevelopmenteffortsinsomecasesstilldonotwork.
Some suppliers do not respond after multiple interventions. Even though they are
sayingtherightthings,nothinghappens.Involvementwithsuppliersspansbetween6
monthsand1.5yearsonaverage. 80%ofthetime,therearesignificantperformance
improvements.In20%ofthecases,therearenone.)

3. Inthenextphase,teamsoftwopeoplearededicatedtoasupplierlocation. Allof
these individuals are QS 9000 trained. The same executive from Chrysler who
initially met with the supplier accompanies the team to meet with the plant
managementgroup,topreventanyperceptionsofconfrontationthatmayexist.

35

4. Thisisfollowedbya23dayassessment(thisisNOTanaudit). Theassessment
identifies what they do well, and where they fall short. The assessment is
structuredasfollows:
Beginning with top management: Is there a business plan? What is the
operating/managementphilosophy?
Itassessesallsegmentsoftheorganization,includingquality,purchasing,and
engineering,materialshandling,preventivemaintenance,tooling,etc.Whatare
thestrengthandweaknessesofeacharea,andwhatistheactionplantocarryout
andaddresseachoftheweaknesses.
Theassessmentisheldinextremeconfidence.Onlythetopmanagerswithinthe
SDgroupareincontactwiththetopmanagers,andtheinformationisnotshared
elsewherewithinChrysler.TheSDpeopleatChryslerwillnotsharethespecifics
ofthesuppliersproblems,evenwiththecommoditygroupmanagersatChrysler.
ThisisdonetoensurethatthesupplierwhosharesinformationwiththeSDgroup
canprovideallrequiredinformationsothattheycantrulyhelp,withoutriskof
jeopardizingtheirposition!
5. Theoutcomeoftheassessmentisanactionplan.Thisplanoutlineswhichpeoplein
the organization are responsible for working out the problems. This typically
involvesasetof12dayvisits,12timespermonth. Thesevisitsmaybetothe
manufacturingsite,ortothecompanysheadquarters,dependingonthenatureofthe
problem.Insomecases,Chryslersinterventionidentifiestheproblemasbeingthe
communicationbetweentheplanandtheengineeringfacilityastherootcauseofthe
problem.
BuyerDevelopmentBecomingaBetterCustomerChryslerisalsointrospective
withrespecttotheirroleinsupplierdevelopment,andoftenseekstolookinthemirror.
Thisisdonetoenhancethepositivenatureofthepartnership,especiallyincaseswhere
Chryslerhasinvestedinthesupplieralotovertheyearsandhasdevelopedsignificant
commitment.However,incaseswhereaSDprojectisunderwaywiththesupplier,no
newvolumesonnewprojectsarecommittedtowiththesupplier.Eveninsituationsof
extensivecommitment,iftheinterventionisunsuccessful,thenChryslermayneedto
switchsuppliers.
SecondTierproblemsIn4060%ofthecasesthatwebecomeinvolved,theproblems
ofafirsttiersupplier,whendriventoitsrootcause,arethesecondtiersupplier.What
wefindisthatthepeopleinthefirsttierarelettingitride.Insuchcases,wehaveto
askthemwhyarentyoudevelopingyoursuppliers?Whyarentyouinvolvingthemin
yourproblems? Thisrequires thatweprovidetheirpurchasingpeopleintrainingin
advancedqualityplanning,notnecessarilyinsupplybasemanagement!
WhySupplierDevelopment?Inmostcases,however,Chrysleriswillingtoinvestinan
ongoingsupplierthanswitch. Thisis becausewewouldrather dealwithaknown
quantitythandealwithanunknown.Wehavealreadyinvestedlotsofmoneywiththem,
they understand our systems, and we understand theirs. The Supplier Development

36

initiativeis,inasense,alastresort.Wedonotcommitanyincrementalinvestmentwhile
weareinvolvedwiththem.Theoutcomeiseitherpositive(wecreatenewbusinesswith
them)ornegative(weneedtofindanewsupplier)attheendoftheprocess.
Looking in the Mirror
Chrysler also needs to take an introspective approach every now and then, and identify
ways to improve our communication processes. This is a form of Buyer
Development, in that in 40-60% of suppliers problems have been contributed to
by Chrysler. This involves things such as changing requirements and not telling
them, making design changes at the last minute, etc. The question then becomes,
what can Chrysler do to help the supplier? In other cases, it is not the supplier, but
their second tier suppliers who are at the root of the problem. They are receiving
poor products or later deliveries, but are letting it ride. Chrysler needs to go in
and provide training in such cases on supply base management, even though they
are already getting training in advanced quality planning. Suppliers must
understand that they are responsible for developing their supply base in order to sell
to Chrysler. This may involve sending the supplier to classes in Chrysler Quality
Institute. Gary has a fair amount of leverage internally. His people try to correct
problems within Chrysler in a non-threatening way. The internal assessment is
shared with no one else in Chrysler, so that it cannot be used in future price
negotiations. At best, other Chrysler purchasing people may see an Executive
Summary of the situation which has been edited so that it is politically correct.
In this way, Supplier Development can work with the supplier to understand what
Chrysler people are doing that may be causing problems. By approaching the
supplier in a reasonable manner such as this, the supplier can understand why the
development team is there, and can also understand why change is important.
Suppliers Top Management is Critical Over the last 18 months, 2-3 supplier
interventions have failed (out of a total of 35 suppliers). Gary maintains that the key to
success is top management at the supplier. If the suppliers top management is willing to
listen and understand, than a major part of the problem will be eliminated, and the
intervention will work. This is similar to an intervention with an alcoholic if they listen
and are willing to admit there is a problem, there is a chance it will work. Some of the
problems may be simply that they are not measuring their performance internally (on
cost, quality, delivery, etc.). At the larger suppliers, when they talk to the people at the
Director level, they often find that they dont measure the right things. For instance,
perhaps they are measuring the number of parts made today, but not the number of
defective parts made. Generally speaking, what gets measured gets managed. This is a
major insight to many Directors! In some cases, the PASS reports (supplier evaluation
reports) provided by Chrysler to the supplier has never been seen by the Director of the
supplier!
No Financial Investments
Chrysler provides almost no financial investments in suppliers, except in cases of a dire
emergency. An emergency might be, for instance, a minority supplier who is facing

37

financial distress. Some indirect financial assistance may be provided. This policy is a
function of the price of entry in the auto industry as a whole: it is a capital-intensive
industry, and through a process of natural selection, only those companies who can make
the financial thresholds have a chance of surviving. Almost all of Chryslers suppliers are
US-owned and operated companies (non-transplant).
Human Resource Issues In some cases, Chrysler will help suppliers with their HR
issues. For instance at one supplier, there were too many contract people, and an
excessive high turnover of salaried employees. It turned out that the pay levels for these
people was too low for the region. In general, Chrysler does not however get involved in
union negotiations.
Supply Base Reduction Chrysler has undergone a significant reduction of its supply
base to date. The late 80s and early 90s were a period of high supply base
rationalization. This is an on-going strategy today (but at a lower rate), with the goal
being to single source by part number, but with at least two suppliers per commodity.
The business is then shared across platforms. However, the business for a model within a
commodity group will not be shared across suppliers. This is intended to maintain/foster
competition among suppliers, yet get the benefits of single sourcing.
Supplier Involvement in New Product Development The technical people at Chrysler
now understand the importance of making sure that the latest technology is being
introduced into new models from the supply base. Gary is involved in ensuring that
suppliers are capable of meeting Chryslers technology requirements, and that they have
the capability before they become involved in the new product development process. For
example, suppose a new supplier to the auto industry is being considered for sourcing a
new technology. Garys group will work with the supplier to help them understand how
to do business with Chrysler and to shorten the learning curve. One way this is being
done is through the development of a book that documents how to do business with
Chrysler, and covers such details as quality requirements, engineering, supply policies,
etc. We often assume that everyone knows these details, but a new supplier does not!
International Supplier Development This learning book will be especially useful as
Chrysler begins to produce and source in Europe and South America. For instance,
Chrysler will be building a Jeep in Beijing China, and is establishing an assembly plant in
Gratz, Austria and Stire, Austria. It also has facilities in Venezuela, Argentina, and
Brazil, and is establishing a joint venture with BMW in Brazil to have local assembly of 6
cylinder engines. However, the involvement in supplier development to date has been
100% North American suppliers (including Mexico). Gradually, this will change, as the
supply base is expected to move into Eastern Europe and Latin America.
Supplier Dependence There is no formal cap on supplier volume, but for smaller
suppliers, Chrysler keeps an eye on their total volume to Chrysler. If it begins to rise
over 40-50%, they need to ask themselves if this is wise as it may foster too much
dependence. At this point, the supplier may be encouraged to get more business
elsewhere. Gary also notes that loading up a really good supplier with too much work

38

can cause additional problems. The supplier may lose their enthusiasm, which is
something that Chrysler wants to keep in a learning organization. Chrysler also has a
finance group within procurement that evaluates suppliers financial health. It is also
important to understand what the second and third tier suppliers are doing and what is
going on. For instance, one second tier supplier selling to a first tier was also selling
directly to Chrysler. Although the quality to Chrysler was acceptable, the quality to the
first tier was no good, and the supplier eventually went out of business. This makes the
Extended Enterprise all the more important.
Breadth versus Depth In corroborating the BMW benchmarking study, Chrysler has a
wider scope of breadth than BM., but less depth than Toyota and Honda. This is
primarily because these companies have more dedicated resources in supplier
development than Chrysler.
Information Systems in Supply Base A major issue here is whether suppliers have
effective measurement systems to gauge performance (especially quality), and whether
they communicate effectively between their functions. This is important, because 12
months from now, all suppliers are going to have to have EDI to effectively supply
Chrysler. Chrysler recently benchmarked 8-9 suppliers, including 2 Pentastar Platinum
Award suppliers. These best in class suppliers in general had the absolute essentials in
place: top management was committed to excellence, and the measurement systems were
complete and measured all of the critical areas, including process, inventory, quality, and
delivery. Further, these measures were reviewed every week for at least 2 hours every
week by the entire team, and were updated on a daily basis. However, they also
uncovered a number of problems, even with these suppliers. The suppliers had no Cpk
(process capability indices) being tracked in their system, and although they tracked SPC
charts, they were not effectively being used.
Suppliers communications with Chrysler are a big problem in information systems.
Suppliers are not clearly establishing clear contacts within Chrysler with respect to
information on quality, purchasing, etc. Part of the problem is that Chrysler is also not
clearly identifying expectations, requirements, deadlines, and late design changes. This
latter issue is an especially big problem. To remedy this situation, Chrysler has instituted
a new policy called 4-Ever Requirements:
If you have a problem, CALL us.
If you change your materials, CALL us.
If you change a process, CALL us.
If you change a manufacturing location (process location), CALL us.
This policy has been instituted, because even an innocuous change to a material/process
can have disastrous consequences. In one case, a supplier moved an entire supplying
process to a different plant, and did not tell Chrysler! At that point, they did not know
who their primary contacts in engineering, purchasing, and quality was anymore!
Supplier Councils This is headed up by Thomas Stallkamp, Executive Vice President
of Purchasing at Chrysler. Stallkamp meets with the Supplier Executive Roundtable

39

every 2 months. The Roundtable is composed of senior executives from 15 direct

suppliers, 1 raw material supplier, 1 tooling supplier, and 1 indirect material supplier.
Under the Executive Roundtable, there also exists a Supplier Management Roundtable
(led by Senior Procurement Executives), and a Quality Roundtable (led by Supplier
Development and quality executives). The structure of these roundtables also mirrors the
Executive Roundtable. Every year, 1 2 suppliers are rotated in/out of the Roundtables.
Suppliers are selected for inclusion only if they are key suppliers of key technologies,
high volume items, etc. Inclusion on the Roundtable is by invitation only. Unfortunately,
there is little cross-fertilization across the different Roundtables. At the Supplier
Development Roundtable, Gary works in running by suppliers some of the different
approaches, techniques, and tools that will be used in the future to get their feedback.
Twice a year, Chrysler also runs Supplier Events, in which the top 130 suppliers are
invited to get the best of them involved. At this meeting, the Executive VP of Purchasing
talks with suppliers on industry trends and Chryslers needs.
The Formalization of Supplier Development The impetus for a formal supplier
development program at Chrysler began 2 years ago, which was when Garys supplier
development department was originally started. Procurement executives came to the
realization that they had a lot of catching up to do in the quality area. Chrysler has
significantly raised their internal and external quality benchmarks, and the company
realized that suppliers are incapable of doing this on their own. This was both a top
management and purchasing realization. Some suppliers need a lot of help, and we
dont have the time to help them! Yet we realized that if we dont do it, nobody will.
Helping suppliers thus just made good business sense. This resulted in the formation of
a formal Supplier Development group headed by Gary. New headcount was added
instead, several departments had to provide some of their best people, in order to create a
vested interest. Now however, Supplier Development is in the process of adding people
because of the enormous demands.
Justifying Supplier Development In order to justify the formation of this group, some
key measures needed to be established. Performance of the group to date has been
impressive:
35% of suppliers have increased quality, etc. by more than 70%
35% of suppliers have increased quality, etc. by 40-70%
20% of suppliers have increased quality, etc. by 1-20% BUT
10% of suppliers have actually gotten worse!
In working with downstream carriers, the group has been successful in reducing damage
to vehicles being transported, reduced the cycle time required to get vehicles to
customers, and increased the number of delighted customers at the dealerships by
working to better manage diagnostics and faults. They have also worked more closely
with suppliers to improve delivery of aftermarket warranty parts (this group also reports
to the Supplier Management group.)

40

Customer Advocate Group This group is chartered to listen to the dealerships and
bring the voice of the customer back to Chrysler (BEFORE the warranty reports start
rolling in). In 1996, Chrysler established a Warranty Reduction Program that involved 14
suppliers initially, and which has 60 suppliers today. The focus of this program has
changed from blaming suppliers for problems, to encouraging suppliers to take the lead in
assessing warranty issues and getting them resolved. They are given warranty targets in
order to get SCORE credit. Suppliers leadership is incited to resolve warranty issues,
and Chrysler gives these suppliers on-line access to warranty data. Currently, 175
suppliers have access to this data. The focus of this program is on reducing warranty
costs. No finger-pointing is involved, but suppliers are expected to just fix the problem.
Automotive Industry Action Group (AIAG) This group was formed by the Big Three
and its suppliers in an effort to get together and resolve issues of a common nature (such
as EDI standards). Most recently, it has developed a common quality standard called QS
9000. This has also proven to be a significant supplier development technique, as it
provides a common language and system for managing quality. To date, a significant
portion of the supply base is registered to this standard. However, the standard represents
only a base from which to begin quality improvement. The real challenge is to maintain
the discipline needed after the initial QS 9000 certificate, and adhere to processes. QS
recertification occurs every 6 months.
Work with External Parties Chrysler has most recently been working with the Edison
Welding Institute in Ohio to help provide technical assistance to suppliers. The Institute
is half funded by the government, and half funded by Chrysler. The objective of the
institute is to improve Chryslers welding/joining capabilities, by developing a set of
procedures to follow in welding processes. So far, five suppliers have adhered to the new
process, while a sixth supplier is NOT following the process, but wants to go outside of
it. . Gary has emphasized that the supplier MUST follow the process.
Mentoring In some cases, suppliers have undergone mentoring by other suppliers in the
supply base. Future: This is a relatively new program that may be formalized in the
For instance, one supplier has had problems with managing the level of torque required in
their processes. This supplier has since undergone a mentoring process by another
supplier, who is considered a good supplier to Chrysler, but not a competitor to the
supplier experiencing the problem. The technically proficient suppliers supplier from a
different commodity group has stepped in and helped advise them on how to manage
torque, acting as a mentor.

41

BestCase3:SupplierDevelopmentatHonda
Hondabeganin1948inHamamatsu,Japan,asamanufacturerofwarsurplusgenerators
attachedtobicycles,thuscreatingacrudeformofmotorcycle.Thecompanythusbegan
verymodestly,butby1954hadadoptedthefollowingmotto:

Internationalviewpoint
Productsofthehighestefficiency
Reasonablepriceforcustomersatisfaction

Thecompanywasnotallowedtoproducecars,butearlyonMr.Hondabeganhoundinga
governmentofficialtoallowhimtoproducecars.Itfirstenteredtheautomobilemarket
in1964,whentheofficialfinallygaveMr.Hondathepermitafterhecampedoutoutside
hisofficeforseveralweeks!However,upongettingthepermit,Hondafoundthatfew
supplierswerewillingtoprovidepartstothecompany. Thus,thefewsupplierswho
were finally convinced to supply the company were instrumental, and Honda has
maintainedclosenesswithitssuppliers.TheseinitialsuppliersarestillsupplyingHonda
today.
Currently,HondaofAmericahas322domesticsuppliers,ofwhich50arerawmaterial
suppliers.Thecompanyhasonlyseparatedfrom12supplierssince1958,incaseswhen
thesuppliersrefusedtoimprovetheirquality. Process/qualityimprovementisamajor
factorevaluatedinsupplierrelations.
Asupplierevaluationgenerallyconsistsofaseniorlevelmeeting,followedbyvisitsand
evaluations.Theideaistoseekmutualdependabilitywithsuppliers.
EightypercentofthevalueofHondasproductscomesfromsuppliers,sopurchasing
holdsaverystrongpositionintheorganization.TheVP,DaveNelson(nowexecVPof
HAM)reportstotheCEO,and2/8membersoftheBoardofDirectorscamefrom
purchasing. Eightypercentofitemsaresinglesourcedwithonesetofdies(butdual
competitionbyplatform.
Anexampleofthisstrategyisasfollows:SupplierAsourcessteeringwheelsforCivics,
andSupplierBsourcessteeringwheelsfortheAccord.Eithersuppliercanmakeeither
part,buteachisasinglesourcebyplatform. Whenanewmodelisintroduced,both
suppliersmaybidontheextravolume,withthebestpriceandbestperformingsupplier
likelytogetthebusiness.
ThebasicobjectiveofHondaistomanufacturethroughouttheworld:Youmustbuild
whereyousell,andbuywhereyoubuild.Thus,Hondaseekstodeveloplocalsuppliers
worldwide.Marysvilleisnowamotherplantforotherchildren,namelytheplantin
Guadalajara,Mexico.TheEastLibertyplantproducesthe2doorand4doorCivic,the
Acura(online in 1995,and100%designedin theU.S.),while the Marysville plant

42

producesthe2door,4door,andstationwagonAccords. Hondaistodaythelargest
exportersofcarsintheU.S.
ThepatternofdomesticsupplierdevelopmentforHondaisremarkable:
27in1983
51in1985
216in1990
322in1995
350in1997
Intheearlystages,Hondawouldnottakeonsuppliersuntiltheywereready.Today,the
96Civichas92%domesticcontent,theAccord90%.
HondaSupplierSupport
TheHondasuppliersupportinfrastructureisvast. 11,000employeesworkinOhio,of
which1000workwithsuppliers.Currently,310peopleworkinpurchasing,ofwhich50
areengineersthatworkexclusivelywithsuppliers.
Severalexamplesillustratetheextentofthissupportfunction.
Inonecase,asmallplasticssupplierdidnothavethecapacitytokeepupwithvolume,
resultinginqualitydeterioration.Hondasentfourpeopletothesupplierfor10monthsat
nocharge,withservicesofferedonavoluntarybasis.Thesupplierimproved,andisa
majorsupplierstilltoday.
Akeypartofthesuppliersupport/developmentfunctionistoensurethateveryone
withinthesupplierorganizationandwithinHondaunderstandsthephilosophy.Tierone
suppliersareexpectedtobeselfreliantandresponsibleforworkingwiththeirsuppliers.
Topmanagementsupportisabsolutelynecessarywithineachsupplier.
Thepremiseofmutualdependabilityisacornerstoneofthisprogram.Hondacanbeup
to50%ofasuppliersbusiness(maximumof3%forsteel),butingeneral,thereisnoset
percentofbusinessthatHondawants.
BPProgram
AmajorpartofHondassupplierdevelopmentstrategyisitsBPprogram.BPcanstand
foralotofthings,includingBestPosition,BestPrice,BestProductivity,BestProducts,
andBestPartners.Ingeneral,itsignifiesanytypeofjointimprovementactivitybetween
Hondaanditssuppliers.

43

BPTeamsinitiallylookataparticularmodelline,andworkwithasuppliertoteachthem
tools forcontinuous improvement overa 3monthleadtime. This serves to builda
momentum,anddeliversomequickhits.Goalsandobjectivesarethensetandaplan
developed. If the goals are not met within the given time frame, the development
initiativeisconsideredafailure.
Insomecases,suppliersmayresistdevelopmentefforts. Forinstance,inonecasea2
weeksituationalanalysiswaspresentedtotopmanagementwhenagivensupplierwas
notimplementingtheirstrategy.Thispresentationledtoincreasedawarenessonthepart
ofthesupplierspresident,whodidnotrealizetheyhadsofartogo! Subsequently,
Hondaworkedcloselywiththemovera5monthperiod,with3fulltimepeopleassigned
totheir staff. Theyimprovedquality from700PPMto46PPMpermonth. Best
Qualityisnowafulltimedepartmentwithinthissupplier.
TheBPsupplierdevelopmentprocessgoesthroughaseriesofstages.Phase1isasoft
program,doneattheproductionstage,focusingonprocessimprovements.Phase2isa
moredetailedstrategywhichoccursattheproductplanningstage.Thisisanimportant
differenceinlevelofdevelopment: phase2actuallyinvolvesdevelopingsuppliersfor
newproductdevelopmentpriortoconceptdevelopment.Atthisstage,thepotentialfor
reducingcostisthehighest,butthecostofchangeisrelativelylow. Thiscontraststo
PhaseI,wherethecostofchangeissignificant,withrelativelyminimaleffectoncost
reductiondeterminedatthedesignstage.Thesupplierintegrationprocessintoplanning,
concept,anddesignisshownintheGlobalPurchasinghandout.

44

Planning

ConceptDev. ProductionDesign

Production

Costof
change

Potentialforcost
reduction

PhaseII

PhaseI

Assuch,thereisnoformalsuppliercertificationprocess,butrathercertificationofparts.
Onceapartiscertified,thereisnoinspection,butratheracompletereviewofevery
operationandprocessassociated withproducingthatpart,whichavoidstheneedfor
inspection.
AnInitialProductionParttagisused,andputonanytimethereisadesignengineering
change.ThelinepeopleatHondagenerallyusethisanytimetheydiscovererrors.
ASupplierConferenceisheldannually. Anumberofawardsarepresented,including
awardsforquality,delivery,productionsupport,andproductionimprovement. These
awardsareveryhardtoget,andreflectZeroPPMinqualityanddelivery.Notmanyof
themaregivenout.
TheprevailingwisdomatHondaisthatitisokaytomakemistakes,butyoumustshare
whatyoulearnfromyourmistakeswithyourpeers,sotheycanlearnaswell.Abigpart
ofthisprocessisSupplierQualityCircles,whichareencouragedthroughoutthesupply
base. Hondaprovidesfacilitatorstohelpcreateaprogramthatfitstheirenvironment.
Thecompanystartedwith700circlesin1989,andnowhas4500circles(1995).With
eachqualitycirclehaving510peopleinthem,thisrepresentsapproximately20,000
peoplewhoareallworkingtomakeHondasproductsbetter.
AbigpartofHondasstrategyisTargetPricing(seenotesfromGEBNpresentation).
Honda organizes Purchasing into some very nontraditional areas, including supplier

45

development(SD),andPrototype,andSalesEngineeringandDesign.Thelattergroupis
responsiblefortakingsalescostsandbreakingitdowntothecomponentlevel. Itis
requiredforsupplierstoprovideadetailedbreakdownofprice,includingrawmaterials,
labor,tooling,requiredpackaging,deliveryexpenses,administrativeexpenses,andother
expenses.Thebreakdownofcostsishelpfulinsuggestingwaysthatsupplierscanseek
toimproveandtherebyreducecosts,especiallyformassproduction. CostTablesare
jointlydevelopedwithsuppliers,andusedtofinddifferences(lineitembylineitem)
acrossallelementsofcost.Abignegotiationpoint,ofcourse,isprofitsandoverhead.A
fairprofitisrequired,butmaybedependentonthelevelofinvestment.Nofixedprofit
levelisusedinnegotiations. Purchasingmustthenrollupallofthepartscostsand
comparethemtothetargetcosts. Iftotalcostsexceedtargetcosts,designmusteither
changethedesignortrytomeetcostobjectives.
HondaalsohasaGuestEngineerprogram,whereinsuppliersengineersinvolvedin
productdevelopmentmaybeaskedtoparticipateandworkatHondaR&Dhandinhand
withHondaengineers.Thishelpslocalprocurementeffortsandspursthedevelopment
ofnewtechnologies bybothsuppliers andHonda. Thisalsohelps supportpotential
exporting of components in later models, but first the supplier must prove himself
domesticallywithlocalprocurementoffices.
Purchasing people at Honda get over 420 hours of training over a 34 year period.
Trainingisalsoofferedtosuppliers.
Hondaroutinelysendsoutsurveystosupplierstoaskthemhowarewedoing? The
resultsaresummarizedandpassedouttodepartmentheads. Itisalsointerestingthat
Hondausesnoformalcontractswithsuppliers,butusesapurchasesandsalesagreement
withboilerplatetermsonly.Nocosts,volumes,lengthoftime,etc.areeverused.
TheAmericanplantisrelativelylowvolumeandsmall,andcontainsonly1/2to1dayof
inventory.TofacilitateJITdelivery,suppliersoftenhavemultipledeliveriesperweek.
Incaseswhentheyarefaraway,offsitestorageisusedtoreceivepartsandsequence
themintoasetwhichisdeliveredmultipletimesperday.Thepartsareeitherputinto
a marshalling line or are received directly. Marysville gets between 50 to 100
deliveriesaday. Deliveriesaresequencedtotheirbodyonlinesequencingassembly
area,whichoccursafterpaint.Aticketonthebodyspecifiesthemodel,color,etc,andis
printedonlineandalsodistributedtosuppliers.Seatsareloadedbasedonsequence,go
ontoaconveyor,andmarriesuptoeachunitastheyarise.
AgreatdealoftrustexistsbetweenHondaanditssuppliers. Trustdevelopsthrough
suppliersupportandcontinuousdevelopment,andoftentakesalongtimetodevelop.A
goodexampleisthecaseofafireatasupplierwhichcausedHondatolose29%oftheir
production. Fortunately,asimilarpartwasproducedbyasupplierinJapan,whowas
abletosourceitshortterm. However,anumberofuniquetoolsweredestroyed,but
sincetheywereakeysupplier,theybuiltbacktheirtools. Thecompanyhadlawyers,

46

engineering,andeveryoneinvolvedinmodifyingtheparts!Hondadidalltherepairson
thetoolsbasedonwhatisbest,andhelpedthembuildupsecondaryfeatures(astheir
engineersweretiedupwithotherissues).Othersuppliersinthesupplybasesawwhat
happening,whichdevelopedgreatertrustthroughoutthesupplybase.
Nevertheless, Honda sets very clear expectations suppliers MUST meet demands,
especiallyduringnewmodelyearchangeovers.Suppliersreceiveamonthlyperformance
report,whichusesanindexsystemtorateperformance. Productionmeetingsarealso
scheduledregularlytoshareproductionplansandotherdetailedinformation.Thishelps
supplier prepare their schedules, and manages expectations regarding new models,
prototypes,etc.
SupplierDevelopmentProcess
Thegeneralsequenceofeventsinsupplierdevelopmentisasfollows:
1. WhenHondaentersaregion,theyhaverelativelylittledomesticcontent.
2. Theythenbeginworkingwithlocalsuppliersindevelopingtheirqualitysystems.
Theyaregivenapart,andaskedtomakeitforus. Theycanthenimitatethepart
untilprocessesarerelativelyundercontrol.
3. Inthenextstage,Hondaworkswiththesupplieronasingledrawing,andtriestofind
waystomakeitbetterandreducecost.
4. Inthefinalstages,thesupplierisinvolvedintheconceptanddesignwork,andis
involved in setting specifications and making cost and value suggestions and
improvements.
Whendiscussingparticularsituationswhensupplierdevelopmentdidnotgowell,Dave
notedthatabigpartoftheBPsupplierdevelopmentteamsinvolveschoosingtheright
peopleatthesuppliertobepartoftheimprovementteam.Itisimportanttogetsenior
managementapproval,butmaybenotagoodideatogetaseniorpersonspecifically
involvedontheteam.Whattheyhavefoundisthatwhenaseniorpersonisontheteam,
peoplewillgoalongwithwhatevertheywant.Ideally,Hondawantssomeonewhoisnot
senior,butwhowillneverthelessbemissed(someonewhowillhurtyou)whenthey
arepartoftheteam.Theymustalsobeafulltimememberoftheteam.
Whendiscussingresourcesinvestedinsuppliers,hementionedengineeringsupportasa
bigfactor.Insomecases,theywillownapercentageofthesupplierforcapitalization
purposes,andallowthemtopaybacktheinvestmentovertime. Thisisusedincases
whenacriticalsupplierrequireshelp.Theygenerallydonotinvestdirectlyinequipment
(wearenotabank).
Davediscussedasituationinasmalltownwhenalocalsupplierhadaweldingsystem
thatdrainedthelocalpowersupply.Allofthelightsinthetownwentdown.Hondasent

47

ateamofengineerstohelpthemunderstandthestepdownfunctionsinordertobetter
handletheloadandavoidunhappycitizens!
Inanothercase,Hondasentfourpurchasingpeopletoasmallsuppliertohelprebuild
their infrastructure forgrowth. Thecompany hadexperienced growingpains dueto
increased volume from supplier, resulting in delivery and quality problems. The
purchasingpeoplespent6monthswiththesupplierlivingintemporaryapartments,and
solvedtheproblem.
Inanothercase,asmallsupplierwasalsonotreadyformassproduction,andHondasent
50people(includingmanagementandsupportstaff)toworkatthesupplierslocationfor
12weeks.Thiscostmillionsofdollarsinlosttime.Today,thesupplierisoneofthe
bettersuppliersofHonda.
Davenotedthatsupplierdevelopmentrequirestrackingthelowhangingfruittogetthe
earlywinsandgainmomentum,butthatingeneralthisisalongtermbusinessstrategy.
The strategy must adopt a continuous improvement focus; otherwise it will not be
successful.
Honda International Purchasing Division
At Honda, all domestic buyers are responsible for both domestic suppliers and overseas
purchasing. The IPD is responsible for coordination between Honda Corporation and its
overseas plant. When Honda launches a new model, the purchasing activity actually
starts two years before the release of the vehicle. It is at this time that the quality, cost,
and delivery criteria are evaluated. Obisan was assigned to the UK before the plant
opened, and was responsible for recommending suppliers to R&D.
In developing local suppliers (no matter what country US, UK, or Brazil), Obisan notes
that the same basic approach is used globally. This consists of using existing drawings
for the models to be built at the new plant (never use new drawings!), and try to get the
best available alternative from a domestic supplier. In approaching the new supplier with
the old blueprints, quality and engineering capability are the most important criteria to
consider (although the lowest price of course plays a role). Once a potential supplier is
selected, Quality and R&D people visit all potential suppliers, and a final decision is
reached.
When a new drawing is issued, quotes from 2, 3, or 4 suppliers may be obtained, than a
final quote based on a more refined drawing is asked for, followed by final supplier
selection. In attracting good suppliers, it is emphasized that they also get the opportunity
to buy the part from a Honda parts dealer, study it, and come to us and see if you can
produce it. In this manner, Honda is always looking for better suppliers who can produce
parts locally!

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Single/Dual Sourcing
Honda suppliers are always subject to competition. In most cases, a parts contract will
last for the life of the vehicle (4 years), with each part being single sourced. The new
Accord has just been launched, and the next vehicle in the pipeline is the Civic 2001
model change. Dual sourcing is used in some cases when delivery problems occur.
Because orders are based on forecasts, a dual source may involve using a Japanese
supplier and an overseas supplier to produce the same part. This is to avoid a potential
situation where there may not be enough capacity with a single supplier. A good example
of this is the headlamp. The exterior of the headlamp is similar for the French and
Japanese supplier, but the reflection mechanism is different in the interior. The French
model uses a higher grade material, so the item is dual sourced. The headlamps are
essentially interchangeable, but differ slightly in their structure.
Recently, Renault came to benchmark Honda. By comparison, Renault in France has 30
suppliers with guaranteed contracts, all of which are preferred! The difference,
however, is that these 30 suppliers have no competition from other suppliers, and are
guaranteed continual contracts with Renault. In contrast, Hondas suppliers are always
open to competition, and there is no guarantee of future business.
For almost all international sourcing, a Japanese supplier is available as a backup in case
of a production problem. Dual sourcing is not preferred by Honda, but it is almost
mandatory in Japan because they cannot risk delivery problems. A Honda production line
in Japan must be kept running, because there is no layoff system. In the US, it is easier to
shut down a line if necessary.
Recently, a Toyota brake supplier (Aicheingiki) had a fire. This was the only supplier
possessing the fine machining capabilities necessary to produce the part. Their entire
inventory, tooling, and machining operations were burned up. Despite the fact that it was
a single source, Toyota only experienced a four day shutdown. How? Other suppliers
help out, including one of Hondas brake suppliers. This illustrates the degree of
cooperation, even between competing suppliers.
For domestic (i.e. Japanese) production, very few international suppliers supply mother
plants. Almost all are Japanese suppliers. Perhaps only 5% of the parts are sourced
internationally. This is in part to the weak yen. In other cases, Honda will try to
capitalize on other large auto manufacturers supply base. For instance, GM purchases
huge quantities can Honda capitalize off this by buying from the same supplier(s)? To
some extent, as Hondas volumes have increased, they have become more important
customers to their suppliers.
Suppliers Design Capabilities
Gradually, suppliers are having greater influence on Honda designs. To some extent, this
input has been limited because adding extra special unique features tends to increase cost
per unit. In the UK, Obisan fought with Honda Japan because he wished to alter the

49

Honda specification (this is still a problem in the US today). Today, Honda Japan is more
willing to change a specification in order to reduce cost and/or weight. For instance,
engineers are now trying to use more plastic and less metal in the magnesium steering
wheel aperture core. Responsiveness of suppliers is critically important in the early
stages of the product development process. Honda tries to encourage suppliers
suggestions early before finalizing drawings, particularly in the area of cost reduction and
quality improvement. This is to encourage propositions to reduce cost and machining.
That is one reason why top management has decided that purchasing should be at Honda
R&D (this decision was made in 1991. Prior to that time, Purchasing used to be in
downtown Tokyo in Headquarters). Today, both R&D and purchasing people will visit
suppliers in the assessment stage of new product development. This interface between
R&D and purchasing is deemed critical. Although each party may recommend different
suppliers (purchasing emphasizing price then quality), a joint meeting is held to
determine the final selection. This strategy was so successful that Nissan followed suit.
Their purchasing group used to be in Ginza, but is now located in their R&D Center in
South Tokyo. A major barrier that continues to exist is that the elderly people are wellsituated in terms of their housing, and are reluctant to move to a new location to facilitate
co-location.

Supplier Selection Process (New Country)

In choosing new suppliers (e.g. for Swindon, UK), the following criteria are used:

Who are their existing customers (e.g. Nissan, VW), Toyota) that indicates existing
capabilities in the areas of technology and cost? Having some of these customers
indicates some competency.
What kinds of products are being supplied to these other assemblers?
What kinds of parts are you making and what new technology are you expecting to
develop in two years time that is different from existing models?

On initial visits, part-level information is collected. Obisan emphasizes that you must
visit the supplier to understand them! Things to look for include:

Evidence of continuous improvement and environmental activities

Kaizen activities on the shop floor
Machine efficiency (For example, Canadian suppliers used very old machines, and
needed to invest. This resulted in fewer workers and improved productivity.)

Kyoryoku Kai (Cooperative Associations)

Honda is not as interested in these organizations as other major automakers in Japan, and
therefore does not utilize them. This is because they respect suppliers independence, and
wish to free them from obligatory membership in an association. Unlike Toyota and
Nissan, Honda wants suppliers to be free from ties. However, they do have supplier

50

meetings at least 1-2 times per year, where they present quality and cost reduction awards
to suppliers.
Creating Competition Core Competencies
The most important principle is to create competition in the supply base. Thus, even inhouse suppliers face competition. For example on an instrument panel that was
traditionally produced in-house, Honda R&D designed it and purchasing got a good
quotation from an outside supplier. The in-house people could not compete with this
proposal, so some portion of the business was allocated to the external supplier, and the
in-house process was expected to face this competition and find ways to reduce their
costs.
Investment
Honda invests about 20% of their capital in suppliers subsidiaries. For example, Kikuchi
represents a minor investment by Honda, who has a small share of the company. (Mr.
Morita was the purchasing manager in Ohio, and is now at Kikuchi helping to manage
them. This is an interesting point: Honda encourages their managers to go to work for
their suppliers in some cases, so they can better diffuse Hondas working philosophies).
Honda Engineering will in some cases help suppliers with robot design, tool design,
welding, and injection, and may help with investments. Finally, Honda R&D may aid in
product design work.
Honda de Mexico
Honda of Mexico has been producing motorcycles for a long time, and has only recently
begun auto production for sale to the Mexican market. This is a fairly small market, and
the vehicles are not sold for export. Volumes are currently limited to less than 500
vehicles per month. This is a knock-down operation: parts are imported from the
Marysville plant and US supply base (no local suppliers) and assembled in the facility.
Honda moves a lot of its old tooling from Marysville which has reached its end of life to
this plant for aftermarket supply, then may re-export the parts for the replacement market.
Exchange rates continue to be a problem in this market.
Honda-Brazil
This facility began production of the Civic in October 97. Many parts are exported from
the Ohio plant. There are some Brazilian suppliers, including TRW which has a plant
there and is involved in some technology transfer. This is a very small market, and the
peso devaluation makes it very difficult to do business. However, Honda wants to
maintain a presence, as this is a very big future market.
Global Suppliers
A big question that arises as Honda continues to expand its operations is who will
become the global suppliers in the US/Japan/Europe, as well as in the future (Brazil,

51

Mexico, etc.)? Obisan notes that different regions are competitive in different areas. An
ideal global supplier is:

Very efficient in R&D

Equally competitive across multiple global locations
Equally proficient in cost, quality, etc.

Unfortunately, there are very few cases of truly global suppliers. For instance, R&D is
very efficient in Japanese suppliers, but these same suppliers may not be effective at
R&D in a different location. Thus, it is very seldom that they find a supplier that can
supply multiple locations, yet locating these suppliers is one of Hondas most important
development strategies. Finding good suppliers to serve both the US and Japan is not a
problem: few suppliers, however, have truly global capabilities.
How to Develop Global Suppliers:

Requires intensive negotiation and joint understanding and commitment at the top
management level in the supplier
Requires participation by top management within Honda
Requires a common investment for multiple locations, (e.g. Siemens supplies airbag
control units to Hondas plants in both the Europe and the US, in order to minimize
the investment in tooling. However, the control units are actually produced by the
suppliers Mexican plant! Since the units are small, they can easily be shipped to
both the US and Europe
If a supplier is competitive in multiple markets, Honda will use them. This is a very
rare situation.
Competition is always emphasized. If a supplier already provides Honda with parts
in, say, the US, they certainly have a leg up over other suppliers in being considered
for supplying Hondas new facility. This is because they already know what our
expectations are.
Honda places great value on a suppliers ability to improve. If a supplier experiences
defects, but immediately takes countermeasures to prevent it from happening again,
this is considered a plus by Honda.

Improving Communication between Honda in the Four Major Trade Zones

Japanese associates do the same type of liaison, and visit the US. Mr. Toshihiko Morita
was in the US from 1990 to 1994, and was involved in the development of the Japanese
car and the North America Accord, Civic, and Acura. In developing a world car, he
noted that a major challenge involved how to improve communication between the
different groups across the different Honda locations in Japan, Europe, US, and Asia.
Although Honda has an international purchasing office, its power is limited, and greater
communication is needed across the different production locations. The biggest
challenge is how to improve communication and develop relationships across Honda
in the four trade zones. This includes:

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How to share Hondas strategy with suppliers worldwide

How to transfer knowledge across Honda
How to develop supplier capabilities worldwide

The World Car Global Planning Strategy

Each country car is current developed in Japan. The basic concept is the same, and is
then modified by local regulations. In addition, a Four Region Meeting is held quarterly,
with representatives from Japan, the Americas, Europe, and Asia. At this meeting,
planning involves a general strategy to deal with companies that Honda intends to do
business with. For example, the relationship with a Japanese supplier may be more
mature than a relationship with the same supplier in the US or Asia; at the meeting,
executives discuss how to ensure that the child companies can develop to the level of
the parent effectively and efficiently. In most cases, Japanese suppliers are wellintegrated and do not require development. The problem becomes how to transfer this
situation to North America, Europe, etc.
At HAM, the BP strategy seeks to improve performance continually. The process helps
develop a strategy for a next major new model (Accord) that is better that that developed
for the previous new model. Although the local situation is important, the problem must
be addressed at a higher level in order to fix major problems and/or change the plan if
necessary. This often requires that Honda GT (Honda R&D, which includes Purchasing,
Engineering, Design, and Testing, all located in one building) become involved.
Suppliers relationships with Honda are a key factor. Purchasing should be buying from
the best in the world, or must explain how and why they will be doing so.
As Mr. Morita says: The challenge becomes how to develop a relationship with those
suppliers that we believe to be at the top. Honda places value on maintaining
relationships, so we do not enter into them lightly. Because we value them, it is our
responsibility to make our relationships better and ensure that things improve and mature
over time! To do so, we may send people who virtually live in suppliers facilities!
On a regular basis, all of the procurement groups meet at a quarterly meeting to discuss
integrated global purchasing strategy. At this meeting, the discussion focuses on
opportunities for commonality and standardization, coordination with marketings export
strategy, new product planning, cost management, and technology transfer issues within
the supply base.
An important part of this strategy meeting also focuses on development of a truly
global supply base. The following illustration depicts how Honda establishes global
supplier capabilities.

53

HondaMotor
(Japan)
1,100,000

Honda America Mfg.

(HAM)
HondaofCanadaMfg.
(HCM)
850,000units

1
A1 B

A2

B2

C1

Honda UK Mfg.
(HUM) - Swindon
150,000units

A3

D1

HCMT (Thailand)
10,000units

A4

Suppose that a supplier (A) has plants and/or affiliations located in different regions of
the globe. (This is a very common situation for first tier automotive suppliers). For
instance, suppose that A1 is the best in terms of performance, and is located in Japan.
Another supplier plant, A2 , is located in North America, and a third, A3 , is located in
Europe. The supplier may also be asked to startup a plant in Thailand to supply future
production there. Each of these locations produces the same family of components.
Through the quarterly procurement meeting, Honda can compare As performance across
different locations. Procurement managers may share insights and compare As
management styles, productivity, etc. across locations. They can also openly discuss
technology issues with the suppliers engineers at the A1 location, and expect them to tr
ansfer knowledge with the different divisions abroad. For instance, Honda may deal with
the supplier in developing the technology in at the A1 location, and then expect A to take
their practices across A2, A3 , and develop a new supply point at A4 ! They may then
transfer the technology horizontally across subsidiaries in the U.S., thus spreading their
cutting-edge technology globally across all of Hondas platforms. This may require that
Honda be actively involved in helping the supplier to diffuse this knowledge.
A danger with this type of strategy is that Honda might become too dependent on a single
supplier of a given commodity/technology. To guard against this possibility, Honda has
established a network of suppliers that are competing against each other globally. In the
diagram above, suppose that Supplier A is Tokyo Seat Technologies. (This Japanese
supplier actually has some Honda engineers employed there, and Honda has a minority
financial stake in the company). In Japan, Tokyo Seat competes against Tachess (B 1).
In the US, Tachess has a Joint Venture with JCI ( shown as B 2 C1 ). In Europe, Tachess

54

also had a JV with Bertron Fouray (20% ownership), which is currently dissolved. In this
manner, Tokyo Seat must face competition by independent companies in each of the areas
in which it competes, even though it is closely affiliated with Honda.
The relationship between Honda and Tokyo Seat is a type of keiretsu. Honda owns
shares in Tokyo Suit. It is also commonplace for retired Honda engineers to leave the
company and go to work at Tokyo Seat, and perhaps work for any one of their locations
over the world. This further helps to transfer technology throughout the global supply b
ase. However, Hondas keiretsus differ from other Japanese keiretsus, because there is
legitimate competion. In the words of Mr. Morita, The supplier must earn the business
it is not automatic. Price is always the key expectation, and there is no loyalty to a
competitor who can provide the same or better performance in QCDD-M (Quality, Cost,
Delivery, Development, and Management). (It is also interesting to note that the former
President of HAM is now a suppliers stamping plant president this did not seem to
bother the interviewees at all, and was considered relatively commonplace!)
Although this is just a single commodity example, Hondas goal is to establish an entire
network of suppliers that are competing against each other globally. A major driver for
this objective is that at procurement meetings, designers do not wish to work with five
different suppliers, but prefer to work with one and maximize the design potential across
all of Hondas platforms globally. This helps to minimize the different modifications of
its technology required for global diffusion, yet facilitates adaptation to local market
conditions.
Global Supplier Development The PACK Teams
Transfer of personnel also occurs in order to transfer supplier development practices. In
one case, a senior manager from HAM went to work at HUM in order to transfer supplier
development expertise to its UK location. This initiative has only just started.
The supplier development concept at Honda is defined loosely from Japanese as a sense
of performance, which is used to help suppliers improve. A major initiative involves
using a technique known as PACK teams. These teams are composed of manufacturing
experts who travel for extensive periods in teams, and who transfer Honda know-how
throughout its supply base. These individuals are hand-picked from Honda Japan, and
have temporary visas that allow them to travel for five months (maximum). The team
works extensively during the prototype stage in order to ensure that the necessary quality
systems are in place within the supply base. By definition, these individuals must interact
with Hondas local Supplier Development group, in order to find out which suppliers
require immediate help. The PACK team is a major factor in ensuring that suppliers meet
timing requirements in the new product development process, so that the supplier can
easily slip into the mass production phase. The tam also transfers knowledge from
Honda' Japanese supply base to suppliers in North America and worldwide. For the
most part, this team has focused on transmission parts. In transfering their knowledge,

55

they also transfer knowledge to the local supplier development group, who picks up the
slack when the PACK team returns back to Japan.
The mother company of the supplier is expected to transfer the technology provided by
the PACK team for their similar products across other locations (accounting for local
variation). This is part of their responsibility as a Honda supplier. In cases when the
supplier is not global (e.g. BF or supplier D), they will send a guest engineer to Tokyo
to work with Japanese designers at Honda R&D. An on-going problem that is
encountered in this process is the poor transfer of technology across the same supplier
(same problem noted with BMW).
Purchasing Liaisons
An important task in managing this process is the management of the relationship
between the designer and the guest engineer. To achieve this, a Purchasing Liaison
Associate is assigned to monitor the relationship over time.
The purchasing liaison is a relatively new concept. Currently, it is used only by HAM
(Mark Ehrlich is the liaison for HAM serving in Japan). Next year, HUM (UK) will also
send a purchasing liaison.
The primary task of the liaison is to ensure that the supplier is properly prepared to work
with the design team at Honda R&D. For instance, they may inform the supplier Dont
come here and make a presentation unless you reall understand and have addressed all of
the following items: corrective action, FMEAs, etc. Although Hondas R&D people
are prepared to treat suppliers healthy, it is generally a good idea to ensure that the
supplier has thought through all of the relevant issues, as well as what they want to
achieve, prior to meeting with the designers. The liaison ensures that the supplier is
ready to present to Honda, by ensuring that suppliers have done a careful self-analysis of
their capabilities, and have a clear goal for their presentation. This dramatically increases
the success rate of the supplier/designer interface.
Performance Capabilities QCDD-M
Hondas primary objectives are in Quality, Cost, Delivery, Development, and
Management. The last of these is considered critically important it refers to the
management capabilities of the supplier, in terms of strategy, measurement, and planning.
It is a soft objective, but is one of the most important. A big part of supplier
development involves ensuring that the supplier can hit Hondas QCDD-M targets. The
PACK team helps to transfer technology worldwide before mass production. This
enables longterm international global support. In December 1997, the PACK team
consisted of 15 people who were on temporary assignment out of the Ohio plant for 5
months.
Moving Capacity Globally To drive improvement, Honda may introduce new business
to suppliers in order to improve them. For instance in Thailand, many of Hondas

56

competitors have actually reduced their production because of the financial problems
being experienced by many suppliers. Honda views this current crisis as an opportunity
to improve the supply base, and has just begun production of the CRV in Thailand. This
makes the best of a poor opportunity: Thai suppliers get more business, and associated
support. The timing for this move was excellent, as CRV production in Japan was at
100%. To improve performance in the supply base, Honda introduced this very popular
product from Japan to Thailand in order to force suppliers to improve their capabilities in
this region of the world.
Transferring Technology Globally Between Suppliers
There is very limited transfer of technology across suppliers (in contrast to the Toyota
strategy). Part of this is because of Hondas wish to introduce competition within the
supply base as a motivation for improvement. There is also very limited technology
transfer from Japanese to non-Japanese suppliers.
In limited situations, some technology transfer occurs. For example in welding special
materials (a zinc alloy), the volume in the UK was not high enough for a Japanese
supplier to build their own supplying plant in the UK. Honda then requested the Japanese
supplier to share limited technology transfer to a UK supplier. The UK supplier may
receive assistance in developing the welding technology from the Japanese supplier, get
the business from Honda, and then pay a royalty to the Japanese supplier.
In another situation in the US, a major producer of casting products in Japan helped
HAM to enter into an agreement and transfer production expertise to a US supplier.
HAM coordinates the transfer. HAM thus developed a local source for the casting
through a royalty arrangement with the Japanese supplier. The tooling die was built in
Japan and shipped to the US supplier. Thus, HAM did not have to worry about the finish
of the parts, since the die was sent directly to the US supplier. HAM thus benefits from
shorter development and delivery times, quality, etc. The Japanese supplier that did the
transfer may also benefit in other ways than the royalties, in terms of establishing a
preferred relationship with Honda, which is important in gaining future business.
In rare situations, tooling in Japan will be sold to a competing supplier. However, very
limited help is provided in such cases.
Major Obstacles and Challenges in Developing a Globally Aligned Supply Base
One of the most critical challenges in deploying this strategy is getting suppliers to
develop a global competence, (one that is aligned with Hondas global perspective). This
is not easy, as the following story illustrates.
In the previous example of the global supplier (A), HAM has been unsuccessful in
dealing with their contact at A2 . Although A1 (the mother company) has a very close
relationship with Japanese buyers at Honda Motor Company, the people working in their
A2 location may not understand As global strategy, and may not have a network in place

57

to share production technology, design, expertise, etc. globally. As a result, the buyer
working at HAM may not be happy with the results of this outcome, and may not wish to
source from A2 , as they may also not fully understand the role of the A supplier in the
Honda network. Major challenges exist in deploying this strategy:

How much has Honda done to challenge the mother supplier to transfer technology to
its children?
How to get the mother company to communicate value analysis and cost reduction
ideas to their children?
How to enable the global network to communicate cost reduction opportunities, yet
not use them exclusively to their advantage when they do so?
How to get Honda associates to force their local supplier (A 2 in this case) to go back
to the mother company (A1 ) and get help from a guest engineer or other form of
expertise?

To some extent, these challenges will evolve as Honda continues to expand. Honda
started initially in motorcycle production, where it did and still does produce in almost
every country in the world. As it expanded into automotive, it also began to expand sales
country by country. Motorcycle production is not nearly as large or complicated an
investment as automotive (and is large a knockdown type of operation.) However,
many of the lessons learned in motorcycle production globally is being applied to
Hondas automotive production expansion worldwide. Moreover, they have been down
this route before!
Hondas Localization Strategy
The soft area of supplier development (ref: interview with Leon Nichols at HAM), was
established as part of supplier development because of the timing and speed of the exodus
of Japanese suppliers establishing transplants in the US. They simply needed help
understanding local conditions!
Honda has established a fixed process for localization:
Find a local supplier (single source)
When volume doubles, develop a second or third source
In cases when a mismatch in the philosophies of the supplier and Honda arises,
Honda must nevertheless respect the agreement / contract to do business.
In cases when recurring problems with the supplier occurs, it becomes difficult to
consider them for future business unless the problems can be resolved. If the problems
are of a basic nature, Honda may make less of a commitment (volume-wise). If the
problems are of a fundamental nature that will not go away, (e.g. an inability to even
listen to Hondas proposals, and not even necessarily accept them), then Honda must
consider whether they will be able to work with the supplier five years down the road. In
such cases of a fundamental mismatch which cannot be resolved, Honda will drop the
supplier, as this is a critical stumbling block.

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Actual Place, Actual Part, Actual Situation

A strong focus at Honda is adjusting the relationship to accommodate the local situation.
For example, Japanese and US buyer-supplier relationships are fundamentally different.
How should Honda modify their relationships to accommodate local conditions. In
another case in the UK, there was not enough volume for a Japanese supplier to enter the
market, yet the UK suppliers employed a different engineering approach. In order to
account for such different local situations, Honda has employed the Gimba or 3A
approach: Actual Place, Actual Part, Actual Situation. This means that the actual part
produced by the actual person in the suppliers location is fit onto the vehicle before
being approved for production, to ensure that it meets Hondas requirements. This may
require repetitive changes to the part over time.

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North America Production Supply Base Growth

NorthAmerican
Production
1millionnewCivic
modelsproducedlarger%of
U1suppliersoverallmixof
transplant/domesticbalances
out

Japanesetransplant
suppliersestablished

Somepartsofcar
offlimitsfor
localization

1982

1987

1991
(160Y/$)

1994
(102Y/$)

1997
(130Y/$)

As shown in the above figure, increased local content of U1 (US, tier 1) suppliers was
implemented. In the initial stages, Honda used primarily imported Japanese supplied
parts for assembly in the US. No transmission or engine parts were done in North
America at all. Over time, a number of Japanese transplant operations were developed.
Since 1991, the number of domestic US suppliers has increased dramatically, to the point
where the total number of truly domestic suppliers is about 50%. (The number of US
suppliers, including transplants, is around 95%).
The priority for sourcing all new parts is as follows:
1st priority:
2nd priority:
3rd priority:
4th priority:

US, Tier 1 suppliers

Joint ventures with US suppliers
Knockdowns (produced in Japan in kits for assembly in the US)
Japanese suppliers

Although this progression may seem slow, in reality it is a major step in localization.
Especially between 1987-1991, Japanese suppliers were screened using QCCD-M criteria
and asked to establish facilities in the US. Between 1991 1997, US suppliers were
selected using the same set of QCCD-M criteria as Japanese suppliers. This was a very
difficult set of criteria for US suppliers to meet. For example, companies such as Bosch
and Delco developed excellent prototypes which met the standard, but when volumes

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increased during the mass production stage, many defects occurred. As Hondas volumes
continued to increased, it continued to work with large U1 suppliers for all new business.
Final Story
A very humorous story emerged about Mr. Morita. At one point, a concurrent
engineering project had a series of overlapping activities on a chart. As they were
looking at the chart, he walked over with a pair of scissors, cut out the middle of the
page, and put the two pieces up together. Essentially, he was saying they needed to
reduce the time for the project in half!
400 meter metaphor
Mr. Morita also discussed a metaphor that he frequently uses to emphasize the
importance of continuous improvement. Every new product cycle is like a 110 meter
hurdle race. The hurdles are the same for all of the racers, yet some are able to master
them better than others. They include things such as quality problems, lack of trust, cycle
time, FMEAs, customer requirements, new technology, etc. The finish line represents
the product release. In every race, there is always a winner! The winner ultimately
captures market share, profits, satisfied customers, etc. Generally, the winner is the one
who is able to leap (e.g. manage) all of the hurdles and run (e.g. deploy) the strategy
quickest. However, once the race is over, the racers continue to jog around the track
getting ready for the next 110 meter race, which represents another chance to win!
Although you did not win this time around, by the time you go around the track again,
next time you may be a contender!
One way of positioning supplier development is to understand what are the best
practices at each of the hurdles that can turn contenders into winners. As the race
continues, priorities will shift according to the nature of the hurdle.

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