Management and Development of Suppliers

1. Management and Development of Suppliers 1

2. Outline • management and development of suppliers • rationalization and optimization of the supply base • development of suppliers • industrial practices • McDonald’s suppliers • influences of manufacturing philosophy on purchasing • JIT and Keiretsu • Nissan’s rescue • Carlos Ghosn • Nissan’s Keiretsu

3. Management and Development of Suppliers 3

4. Management and Development of Suppliers monitoring performance to identify poor performing to provide chance to improve to provide a basis for future purchasing decisions maintaining relationship developing capabilities activities by a buyer to improve the capabilities of suppliers to meet the buyer’s short- and long-term goals 4

5. Supplier Measurement Decisions • what to measure • quantitative vs. qualitative variables • delivery, quality, cost reduction, service levels • measurement and reporting frequency • reports to both buyer and supplier • real-time information in problems, troubleshooting, and expediting • daily, monthly or quarterly summary, and annual face-to-face meeting 5

6. Types of Measurements Total Purchases + Nonperformance Costs Total Purchases • categorical system • weighted-point system • cost-based system • Supplier performance index (SPI) • version of SPI adjusted for quantity delivered 6

7. Categorical System Advantages Disadvantages Users • Easy to implement • Requires minimal data • Different personnel contribute • Good for firms with limited resources • Low-cost system • Least reliable • Less frequent generation of evaluations • Most subjective • Usually manual • Smaller firms • Firms in the process of developing an evaluation system 7

8. Weighted-Point System Advantages Disadvantages Users • Flexible system • Supplier ranking allowed • Moderate implementation costs • Quantitative and qualitative factors combined into a single system • Tends to focus on unit price • Requires some computer support • Most firms can use this approach 8

9. Cost-Based System Advantages Disadvantages Users • Total cost approach • Specific areas of supplier nonperformance identified • Objective supplier ranking • Greatest potential for long-range improvement • Cost accounting system required • Most complex • Implementation costs are high • Computer resources required • Larger firms • Firms with a large supply base 9

10. Rationalization and Optimization of the Supply Base 10

11. General Trend: Reduction of Number of Suppliers Dell more than 140 suppliers in early days and about 40 in 1999 McDonald in US hamburger suppliers: from 170 in early days to 5 in late 80’s potato chips: from 175 in early days to basically 1 in late 80’s reason: best trade off in maximizing value and minimizing risk manage and develop with suppliers that can grow with the company 11

12. Rationalization and Optimization a continuous process to determine the number and quality of suppliers in the supply base usually a decrease and occasionally an increase in number of suppliers rationalization: how many and which suppliers to keep optimization: analysis the supply base for keeping the most capable suppliers 12

13. Phases and Activities developing systems to evaluate suppliers evaluating suppliers keeping excellent and significant suppliers replacing mediocre suppliers with better ones initiating supplier development activities to improve performance globally searching for world-class suppliers 13

14. What are the Advantages? US operations of McDonald hamburger suppliers: from 170 in early days down to 5 in late 80’s potato chips: from 175 in early days to mostly 1 in late 80’s 14

15. Advantages buying from world-class suppliers closer relationships with fewer, better performing suppliers fewer quality and delivery problems leading-edge technologies opportunities to collaborate use of full-service suppliers remaining suppliers generally larger in size with more capabilities accessing to supplier’s engineering, R&D, design, testing, production, service, and tooling capabilities fuller range of value-adding services outsourcing integrated items reduction of supply base risk qualified suppliers with more consistent quality 15

16. Advantages lower supply base administrative costs greater information sharing joint problem-solving fewer problem-related interactions with suppliers lower total product cost lower variability in quality and delivery greater production volumes spread among fewer suppliers supplier’s fixed costs spread out over greater volumes incentive for supplier process improvement economies of scale and scope ability to pursue complex supply management strategies supplier development early supplier design involvement just-in-time sourcing development of cost-based pricing agreements 16

17. What are the Disadvantages? US operations of McDonald hamburger suppliers: from 170 in early days down to 5 in late 80’s potato chips: from 175 in early days to mostly 1 in late 80’s 17

18. Possible Risks supplier dependency putting all eggs in one basket absence of competition less motivation for suppliers to control cost and to improve continuously deterioration in performance because of complacent hard to switch equitable contracts to maintain the relationship supply disruption loss of continuous flow of materials overaggressive supply reduction inadequate supplier capacity if demand increases missing qualified suppliers effort to find new replacement suppliers 18

19. Formal Approaches twenty-eighty rule Pareto principle “improve or else” rule need to improve quickly triage approach categorization of existing suppliers competency staircase approach series of performance milestones 19

20. Development of Suppliers 20

21. Supplier Development Process Map 21

22. Industrial Practice  Product Development by Suppliers of McDonald 22

23. New Product Development by Suppliers of McDonald Frenchfries new way to prepare French fries peel off the skin; immediately dried in the air; slightly fried before frozen storage supplier invested US2.5 million to build a factory on this unproved idea from laboratory 23

24. New Product Development by Suppliers of McDonald frozen hamburger, from supplier Keystone old days: three times fresh meat to restaurants 1967 supplier tested 9 months for various frozen agents, frozen rate, temperature, ratio of meat and fat, ways to mince meat quick freezing preserve water, leading to finer meat texture by the ice sharing the technology with other McDonald suppliers single customer: McDonald 24

25. New Product Development by Suppliers of McDonald McNuggets new product idea from McDonald Keystone to get meat from chicken Keystone spent US$13 million to build automated factory for chicken meat processing based on the successful pilot test before the formal approval sharing the technology with Tyson Food 25

26. Questions Why were suppliers of McDonald willing to develop products for McDonald, often without any guarantee on partnership? share their technology and methodology with other suppliers of McDonald? 26

27. Effect of Operations and Culture on Supply Management  Japanese Influences in Manufacturing Processes 27

28. Japanese Influences in Purchasing 28 • necessary to understand Japanese philosophy and practices in manufacturing • from 70’s Japanese ideas being the mainstream • manufacturing: material intense with many purchasing and procurement activities

29. Philosophy and Practices in Manufacturing (Early 70s to Mid 90s) affected heavily by Japan Just-in-Time and LeanManufacturing (Toyota) Keiretsu (Japanese 「經連」) 29

30. Conventional Purchasing versus JIT Purchasing Conventional Purchasing JIT Purchasing Infrequent deliveries, possible for a few weeks’ consumption Frequent deliveries for immediate production Inventory on parts Little inventory on parts Delivery time set by buyer Delivery time dictated by production schedule of buyer Multiple suppliers per part, for quality and price Sole to few suppliers per part, Short-term purchasing agreement Long-term purchasing agreement 30

31. Conventional Purchasing versus JIT Purchasing Conventional Purchasing JIT Purchasing Free product design Product design to minimize # of parts Traditional information exchange, on quality, quality, price, time, venue More information exchange, traditional plus production schedules, production processes, including real-time information Communication between supplier and purchasing Communication between supplier and multiple sections, e.g., production, design, QC, etc., facilitated by purchasing Supplier set price Buyer work with suppliers to reduce supplier cost and price Proximity of supplier being unimportant Supplier close to buyer 31

32. Industrial Practice Rationalization and Optimization of the Supplier Base of Nissan 32

33. Bright History of Nissan 1933: set up in Japan late 50’s: sedan, sports car, and truck in the US under the brand name Datsun late 60’s: popular cars, good performance, nice structure, profitable Datsun 510 sedan Datsun 240Z: fastest seller in the world, half a million in 10 years 1975: Datsun being #1 imported brand in US early 80’s: first assembly factory in Tennessee first for trucks and later for sedan, all well accepted 1989: launched luxury car Infiniti, selling well in the next 10 years 33

34. Trouble for Nissan early 90s: emergency of problems high price, product not as popular as before market share in Japan dropping for more than 20 years by late 90s: running into deep financial trouble debt: US$ 22 billion 34

35. Carlos Ghosn 1954: born in Brazil from parents of Lebanon origin mother; born in Nigeria, a French citizen father: a Brazilian citizen 1960: moved with mother and three siblings to Beirut, Lebanon excellent student, Intelligent, diligent student with various talents undergraduate and master in France bachelor degree in engineering in École Polytechnique master degree in École des Mines de Paris 1978: employed by Michelin & Cie, the largest tire manufacturer in Europe 35

36. Carlos Ghosn 1984: heading R&D of the company's industrial tire division 1985: Chief Operating Office of Michelin's South American operations two factories in Brazil haunted by inflation turned the factories into profitable in two years 1990: chairman and chief executive officer of Michelin North America acquisition of the Uniroyal Goodrich tire company 1996: Executive Vice President of Renault, 2nd in company financial trouble, loss of US$ 1 Billion cost cutting, leading to profit in 1997 1999: Renault purchased 36.8% of Nissan 36

37. Keiretsu#1 term first appeared in 1952 Small and Medium Enterprises Planning Bureau launched the “Keiretsu Shindan” (Keiretsu Diagnosis) objective: improving the relationship between automakers and their part suppliers joint site visit of part suppliers by Aichi Industry Guidance Office, Nagoya Industrial Technology Testing Centre, and the Purchasing Department of automakers advice to and grading for part suppliers part suppliers of individual automakers formed associations some open allowing cross-association membership, some more restrictive social functions and seminars #1Evelyn Anderson. Nissan’s Keiretsu, 19561970 37

38. Keiretsu#1 Nissan special status before the war among automakers losing the special status after WW II Nissan’s policy: importing foreign technology (versus 100% self-developed technology of Toyota) control of foreign exchange in Japan because of shortage in foreign reserve 1952 Bank of Japan rejected Nissan’s application for foreign exchange #1Evelyn Anderson. Nissan’s Keiretsu, 19561970 38

39. Keiretsu#1 Provision Act for the Promotion of the Machinery Industry by the Ministry of International Trade and Industry (MITI), 1956-1970 3 times, each of 5 years for companies of capital less than 50 million yen component makers (i) to apply for foreign reserve to buy foreign technology, (ii) to borrow at a lower interest rate incentive for Nissan to spin off or acquire companies #1Evelyn Anderson. Nissan’s Keiretsu, 19561970 39

40. Nissan’s Keiretsu Table 1, Table 2, Table 3, Figure 1, Table 4, Table 5 close relationship with Nissan for companies in its Keiretsu #1Evelyn Anderson. Nissan’s Keiretsu, 19561970 40