Supplier Development at Honda and Bavarian Motor Works/Rover

Abstract

Purpose: This paper aims to search these types of road maps used for development of suppliers in Honda and BMW/Rover which develop a relationship with theory and practical with regards to supplier’s development.

Approach: Based on a comprehensive, critical analysis of the theory and concepts of Supplier Development in Supply Chain Management; which OEM has the best approach to Supplier Development.

Findings: The Japanese and Western approach has a 180-degree turn in the processes of supplier development, where the Japanese approach succeeds the western approach fails and where Western succeeds, Japanese fails. Apart from that we have also concluded various perspectives, approaches and philosophies of suppliers towards there respective customers. Furthermore, we have tried to find some successes and failures example related to supply chain management and supplier’s development.

Since the beginning of time man’s struggle of development has been continuously improving. With the discovery of fire and invention of wheel man’s step towards great achievement in industrial revolution and with invention of computer make that revolution more mobilized and advanced. Due to that mobilization, demand for various goods increased and with increase in demand the problem of competition, quality, cost and innovation rises within respective OEMs to cope up with pace of industry. For handling problems such as competition, quality, cost and innovation many OEMs have to change, develop and adopt various new ideas, approaches and strategies for their survival in market. For that really purpose many OEMs from last two decades constantly exploring and defining new ways of total customer satisfaction. by designing roads maps with their suppliers in form of supplier’s development through technology, financially and mentoring.

BMW and Honda have one of the best Supply Chains in the world and the critical analysis of them both has provided the evidence that why they are best at these processes. Supplier Development process at these OEM’s is considered as a critical backbone to their production lines; to handle their production problems with suppliers they developed and evolved these processes so they can serve the purpose with full capabilities. The theory and practice at both OEM’s has been analysed and how these OEM’s are able to develop, implement and maintain their Suppliers. Furthermore, it has been tried to research the perspectives, concepts and potential capabilities of suppliers to evolve in the supply chain.

Chapter 1
Supplier Development
1.1 Introduction:

Even though the basic notions of supplier development can be traced back to ancient times and consumer and military buying aspects (Leenders, 1966), it was used more

intensively during and after World War Two by Toyota in Japan. In 1943, Toyota joined a supplier association (renamed thereafter Kyoho Kai ) to assist a number of subcontractors in the Tokai region in improving productivity (Hines, 1994). From then on supplier associations within the Toyota supply network and collaboration between Toyota and its suppliers grew constantly (Dyer and Nobeoka, 2000; Hines, 1994). With some exceptions, such supplier development played little part and was not widespread in the Western economy until the 1990s (Hines, 1994). From then on, firms in the automotive industry pressed ahead with this practice and turned it into a popular and powerful approach to improve supply chain performance in Western industries (Lamming, 1993; Womack et al., 1990).

Other chronicled examples of supplier development practices applied subsequently by firms outside the automotive industry are, for example, John Deere, Harley-Davidson, Digital Equipment Corporation, Motorola, or Marks and Spencer (Golden, 1999; Hines, 1994).

1.2 Definition of Supplier Development:

According to Burt, Dobler & Starling (2003: 514) “Supplier Development can be defined as any activity that a buying firm undertakes to improve a supplier’s performance and capabilities to meet the buying firm’s supply needs”.

According to CIPS (www.cips.org , 24-03-09) “Supplier Development is the process of working with certain suppliers on a one-to-one basis to improve their performance for the benefit of the buying organization”.

According to Watts and Hahn (1993:12) Supplier Development programs are defined as “long-term cooperative effort(s) between a buying firm and its suppliers to upgrade the suppliers’ technical, quality, delivery, and cost capabilities to foster ongoing improvements”.

Krause and Ellram (1997:21), supplier development encompasses “any effort of a buying firm with its supplier to increase the performance and/or capabilities of the supplier and meet the buying firm’s supply needs”.

1.3 Genera Steps for Supplier Development:

Burt, Dobler & Starling (2003: 518, 519) “No two companies approach supplier development in exactly the same way. However, according to Nelson, Moody and Stegner most effective project adhere to the following 12 steps

* Identify and review performance gaps

* Discuss specific about how the project will be approached and implemented

* Work to achieve mutual agreement on project focus

* Identify processes that result in waste

* Compare performance gaps with the desires state

* Establish project metrics and metrics baselines

* Gather and analyze data

* Develop improvement strategies

* Develop an implementation plan

* Calculate the return on investment

* Create and review a proposal with supplier’s management

* Execute the improvement plan

Handfield et al. (2000: 42 ) recommended that the initial supplier development project be one that is fairly simple and likely to succeed so that the ‘biggest quick fix’ and the ‘greatest good’ can occur.”

1.4 Reasons for Supplier Development

CIPS recommends (www.cips.org , 24-03-09) “that purchasing and supply management professionals should be able to identify sound reasons for embarking on supplier development process such as:

* improving supplier performance

* reducing costs

* resolving serious quality issues

* developing new routes to supply

* improving business alignment between the supplier and the buying organization

* developing a product or service not currently available in the marketplace

* generating competition for a high price product or service dominating the marketplace

Supplier development should lead to improvements in the total added value from the supplier in question in terms of product or service offering, business processes and performance, improvements in lead times and delivery for instance”.

According to Sako (2004: 290) “the most limited aim of supplier development is to intervene in order to teach ‘maintenance capability’ with respect to a specific component. At the other extreme, the most ambitious aim is for a company to replicate at its supplier a whole set of organizational ‘routines’ underlying its own evolutionary capability”. There are two dimensions of capability: type and scope. Sako divides “type” into three categories:

* Maintenance : the capacity to sustain performance

* Improvement : the ability to improve performance and the pace at which improvement takes place, and

* Evolutionary: the highest type, which is the ability to acquire new capabilities.

The other dimension, scope, describes the level of activity ranging from a work cell in one factory to the entire organization.”

1.6 Supplier Development & Collaboration:

Burt et al.(2003: 517) “World class supplier development requires a commitment to collaboration between customer and supplier. The commitment must be approached with mutual benefit in mind. Effective supplier development is more than getting cost reductions for a particular part; it means helping suppliers remove wasteful costs from their processes. The strategic intent is to create win-win opportunities wherein both the buyer and supplier gain. For collaboration in supplier development to be successful, the collaboration must have:

· Commitment,

· Communication

· Measurement

· Trust

”

1.7 Supplier Development Process

Handfield et al. (2000: 39, 40, 41) “After scanning supplier-development strategies used in more than sixty organizations, we developed the following seven-step generic process map for deploying these initiatives. Other case studies of supplier development efforts describe variations of this model. Most of the organizations studied deployed the first three or four steps, but they were less successful with the remaining steps.

Step 1: Identify Critical Commodities

Not all companies need to pursue supplier development. Some may already be sourcing from world class suppliers because they have made effective sourcing decisions and supplier selections. Or their purchases may be so small in proportion to total costs or sales that investing in suppliers is neither strategically nor financially justifiable. Therefore, managers must analyze their situation to determine whether supplier development is warranted and if so, which purchased commodities and services require the most attention.

To focus the effort, a corporate-level executive steering committee must assess the relative strategic importance of all goods and services that the company buys and produce a “portfolio” of critical commodities (products or services essential for success in a targeted industry segment). This assessment is an extension of the company’s overall corporate-level strategic planning and should include participants from the functions affected by sourcing decisions (finance, marketing, information technology, accounting, production, and design). 1.1, matrix used to assess the relative importance of company purchases

After classifying commodities accordingly, the resulting portfolio consists of clusters of “noncritical supplies,” “bottleneck supplies,” “leverage supplies,” and “strategic supplies.” Commodities in the “strategic supplies” category are considered strategically important, difficult to substitute or purchase from alternative suppliers (often due to an oligopolistic market), important to purchasing overall, and purchased in relatively high volumes. These commodities become the targets for individual study by dedicated commodity teams.

Step 2: Identify Critical Suppliers

Next, managers must assess how suppliers of strategic supplies are performing to determine which ones to develop. A common approach involves a Pareto analysis of current supplier performance (see 1.2). In this case, the underlying axiom is that 20 percent of suppliers is responsible for 80 percent of the poor performance. Thus, Pareto analysis is useful in identifying suppliers with potential for development, as well as those that are underperforming, low-volume suppliers.

Identifying poorly performing suppliers requires systematically analyzing supplier performance data. Many leading companies monitor supplier performance on a plant-by-plant basis, ranking suppliers from best to worst. They target suppliers that fail to meet minimum performance objectives in quality, timely delivery, cost, technology, or cycle time for analysis and eventual supplier development. The buying firm meets with supplier representatives to determine the cause of the problem(s) and the required corrective action(s). If supplier development is warranted, both firms must harness the resources to drive the improvements. If improvement is not forthcoming, the item(s) may be sourced from an alternate supplier.

Step 3: Form a Cross-Functional Team

Before approaching suppliers to ask for improvements, a buyer must first develop internal cross-functional consensus for the initiative. Such consensus shows the supplier a “unified front” and ensures that all buyer functions send the supplier consistent messages. Purchasing executives continually emphasize that improvements begin from within through “buyer-focused” activities. A buyer must have its “own house in order” before expecting commitment and cooperation from suppliers. Furthermore, to optimize supplier contributions, a buyer must first establish its supply-chain strategies and roles of procurement so that its business objectives are clear.

Step 4: Meet with Supplier Top Management

Next, the buyer’s cross-functional commodity team approaches the supplier’s top-management group and establishes three keys to supplier improvement: strategic alignment, measurement, and professionalism. Strategic alignment requires not only an internal business-technology alignment but also buyer-supplier alignment that focuses on each customer’s requirements throughout the entire supply chain. Supplier measurement requires a total cost focus as well as credibility and participation of purchasing and other key technical functions (such as engineering, quality, information systems, and manufacturing) in both organizations. Approaching a supplier’s top managers with a good business case for improvement sets a professional tone that reinforces the relationship, fosters communication, provides specialized expertise, and develops trust.

Step 5: Identify Key Projects

After identifying promising opportunities, managers must evaluate them in terms of feasibility, resource and time requirements, and potential return on investment.

The goal is to decide whether they are achievable, and if so, what the goals should be. Additional criteria used to evaluate opportunities include willingness and ability of supplier (and buyer) to implement changes, duration of product/service life, strategic importance of the product/service and its impact on the business, return on investment, impact analysis, and standardization.

Step 6: Define Details of Agreement

After identifying a potential improvement project, the parties need to agree on the specific metrics for monitoring its success. The metrics may include percent of cost savings to be shared, percent of quality improvement to be achieved, percent of delivery or cycle-time improvement desired, key product or service performance targets, technology availability, and system implementation targets. The agreement also must specify milestones and deadlines for improvements as well as the role of each party who is responsible for the project’s success, and how and when to deploy the allocated resources. Upon reaching an agreement, the project begins.

Step 7: Monitor Status and Modify Strategies

To maintain momentum in the project, managers must monitor progress and constantly exchange information. Revisiting objectives after attaining a milestone may bring to light the need for new or revised objectives. The parties may need to modify the original plan because priorities may change and additional resources may be needed. In short, the strategy must be revisited to stay “in sync” with events.”

Chapter 2
Supplier Development at Honda & Bavarian Motor Works/Rover
2.1 Supplier Development at Honda

Supplier Development is a rigorous process and Honda is amongst the best, Japanese approach cases to be discussed. Honda approach to supplier development is called BP.

2.1.1 Philosophy of Supplier Development:

“BP Stands for Best Position, Best Productivity, Best Product, Best Price, and Best Partners”. (Nelson 1998:4)

This program was based on 13 weeks after which the supplier was self sufficient to run things in coordination with Honda for better results which improved the supplier business creating an automatic effect on Honda’s production. This philosophy has been carried out throughout Honda since 1976. Another philosophy of Honda for problem solving is 3 A’s according to Nelson “To understand the problem go to the actual spot, examine the actual part, and see the actual situation.” (Nelson 1998:13). So far the capability and philosophy of Honda seems strong to motivate and ignite the process of change.

2.1.2 Approach Towards Supplier:

The need for change at an organisation is carried out after careful observation of processes, to improve to those processes one needs to concentrate on actual problem and plan to improve it so what Honda suggests is; Nelson “Honda’s game plan of assembling less and less on the assembly line and relying on its suppliers to ship in more integrated modules.” (Nelson 1998:24). The most important thing to note is that Honda team always went to the suppliers premises and implemented this programme there, so that the concept of a partnership remains intact.

So to rely on its suppliers an organisation needs to establish a high level of trust on its suppliers; to develop trust there needs to be communication, information exchange between the organisation and its suppliers.

Leadership involvement: The leaders at Honda felt that they should expand their horizons and in order to do that they needed a program; which should be able to adapt and expand with the passage of time.

2.1.3 Partnership:

The concept of Partnership at Honda is very simple when a supplier has committed to the supplier development programme, they commit to being the best supply base for Honda. So the agreement comes to a partnership for 50-50 which is then implemented as that cost management and cost sharing; the profits are invested into improving their processes and overall the profit is shared which then helps Honda and the supplier to raise their stocks. As Nelson briefs “Honda sees no better embodiment of the partnering spirit than this approach to producing benefits.” (Nelson 1998:175)

2.1.4 Supplier Selection:

Supplier Selection at Honda is a very precise process “Nelson (1998) talks about a supplier selection matrix”. First of all according to precise and exact parameters selection is based on either a supply base or a commodity; this is determined through selection criteria; which are decided upon either units per dollar, delivery processes, quality of parts and the number of rejects, and target cost versus actual cost. “Nelson (1998) briefs; BP team then fills the matrix according to their criteria based on the supplier capabilities which then allows them to rank the options”. Suppliers who then achieve top scores are not selected automatically; they are then considered for long term relationship regarding commodity, strategy, future analysis of program life of supplied parts and past working relationships.

2.1.5 Structure:

Honda has an inorganic, informal structure where everyone is treated equally; the employee is called an associate. Honda is very specific about this rule and as “Nelson explains (1998) introduced the concept of management of walking about in which the floor manager is scheduled to be at places on the manufacturing line at part, instead of being called if some problem appears”. Honda not only maintains this structure at their premises but it is a part of the Honda’s supplier development programme which not only includes the programme of cost reduction, quality improvement, delivery processes, manufacturing line processes, and quality but also the structure of the organisation.

The role of leadership at Honda has been very positive and encouraging to come up with new ideas; they won their trust by confiding in them and motivating them to tell them what problems they were facing and what sort of problems they have had on the manufacturing line as “Nelson (1998) narrates the story of reyonessa project where an associate roccio was encouraged to tell them her problem and after a slight adjustment with her process they had increased her efficiency.” This is a perfect example of how Honda sets up the supplier development programme and makes it work.

2.1.6 Goals, Targets and Results:

The goal of Honda is very clear and elaborated on supplier development which explains the concept of supplier development for Honda, according to Nelson “to create highly productive, cost effective manufacturing method-draws on the knowledge of production associates.” (Nelson 1998:146) The target of Honda was to create a world class supply base and for that matter they involved all of their suppliers to take up BP programme and encouraged their motivation to be a world class supplier, so the supplier development programme demanded some serious commitment, results within a specified time. So in 13 weeks time the supplier was made to practice the different techniques and tools; which then allowed them to evaluate the processes and the percentage of efficiency; some processes got efficient up to 45% and as “Nelson (1998) briefs that in reyonessa project the efficiency of the plant was increased by an estimate of 46%.”

2.1.7 Supplier Empowerment & Self-Reliance Strategy:

Honda’s programme of supplier development ‘BP’ had the purpose of equipping the supplier with self reliance so that they can rely on themselves rather to look up to Honda again and again; Honda teaches the 1st-Tier supplier to be self reliant with all the other functions of supplier development and this serves well under the agreement that supplier-customer will pass this strategy on to 2nd and 3rd-Tier suppliers. Nelson briefs that “long term, Honda wants a stronger, competitive supply base whose self reliance ensures continuous improvement” (Nelson 1998:147)

Supplier Empowerment and self-reliance are both interlinked. According to Purchasing Magazine “This is the crux of Honda’s strategy, both in general marketing and supply base management. Honda believes the old axiom, “if you give a man a fish, you feed him for a day, you teach him to fish, you feed him for a lifetime.”” (Purchasing Magazine c1995) Honda’s goal is for suppliers to reach a level for understanding and implementation of Honda’s manufacturing philosophy where the supplier no longer needs help.” In another part where Nelson states “Team’s partnering relationship with supplier associates, as everyone begins to understand that they are not assembling or making parts -they are building a Honda(italic in text).” (Nelson 1998:147)

Leadership in the lean enterprise holds a strategically important role as Nelson explains “Honda supplier development philosophies are built on the idea that teaching suppliers how to perfect their process and how to become self reliant, rather then hammering cost savings, will yield long-term, permanent results.” (Nelson 1998:203)

2.1.8 Management Tools and Techniques:

There are always certain set of tools used for any process and for the supplier development process at Honda the tool used is BP which is “BP stands for Best Practice, Best Partners, Best Position, Best Productivity, Best Product, and Best Price” (Cited et al Nelson 1998). Amongst all the tools the most important tools and practices that Honda team has consist of some of the tools which are BP, COPDS, 3A’s, Management by walking around, PDCA. Supplier development is a rigorous process; first thing which Honda does is to change the working environment by changing the attitude of the people which is to first of all, call employees: associates.

Then the next step is to release the creativity of the associates and motivate them to come up with ideas because Honda believes that no manager can better know the problems being faced on the supply or production line then the associate itself, they came up with simple techniques which include COPDS: cleanup, organise, pickup, discipline, safety, the main strategy is the visibility strategy; which is everything should be visible and in order so that there might not be any problem picking that up and putting it on the assembly line and everything should be easily accessible which includes all the tools, modules and parts for the manufacturing.

Supplier management meetings and arrangement of a war room where the associates were supposed to meet every day for short meetings and briefings before going to manufacturing line, these meetings at first consisted of the Honda BP implementers and the associates of supplier but afterwards when the supplier was self reliant this room was dedicated to meetings before starting the shift.
2.1.9 Learning and Knowledge transfer through Supplier Development:

Learning through Honda’s supplier development programme has been of great essence for most of the 1st-Tier suppliers as after improving their own processes they have turned to their suppliers and offered them the same programme so that they can also become lean and follow the same rules of supply chain management, when supply chain is effected at some point, it is overall affected from top to bottom. The knowledge transfer process at Honda comes from following all the tools & techniques of supplier development programme because once someone starts practicing these processes and comes to the conclusion of how it has affected their progress; what difference it has made to their work, they adopt the process and live with it.

2.1.10 How Honda takes on supplier development?

In view of the author Honda OEM has a very serious concern with suppliers and their development, hence they not only select suppliers but give them the opportunity to become the best; Honda believes in single sourcing per commodity or supply base and since single sourcing can be a disaster yet Honda has pulled it off and made it work for them. The most important point in single sourcing is that Honda has made sure that their suppliers will also make sure of their on time deliveries, reduce overheads, keep up with schedule and fully utilise the JIT and Kanban. The only point to make is that this OEM is not only making it for itself but also for its supplier which leads them to a mutually beneficial, understandable and firm agreement which not only leads them to gain full confidence in their suppliers but also the suppliers to have confidence in their customer.

2.2 Supplier Development at Bavarian Motor Works (BMW)/Rover

Supplier Development at Bavarian Motor Works ‘BMW’ is carried out by an approach which is most suitable according to the nature of project and time to do business with their suppliers. BMW had moved towards ‘Order To Delivery’ (OTD) which is a customer-order-driven process, and the time is set to 14-21 Days (Cullen 2002 cited in Zhang et al. 2007) which in view of author clearly declares that OTD means that in order to achieve it the relation with supplier should be very strong and there should not be any communication gaps between supplier and customer.

Supplier development has always been innovative in case of BMW, because every time they have improved their process and brought something new to the table.

2.2.1 Supplier Development Approach:

The philosophy of supplier development or supplier development approach used by BMW; which as researched is used in Germany by BMW as ‘process consulting’ approach. Handfield cited et al. (2008:172) but in North America they had to change their approach by making slight modifications to this process. BMW used this approach differently in different regions; they did not use any rigid method so that they did not implement same process everywhere but always made modifications to the system, which means that they never had a consistent but variable method of developing suppliers approach.

Process Consulting approach is useful in a place where the supplier has a very strong idea of what the customer demands, because of the long-term relationship which they have established over the years of partnership. (Handfield 2006:396). According to author this approach used by BMW is very simple in its context but it leaves the supplier in devastation because by comparing the strategy acquired in Germany and North America differently and if it takes years for the supplier to develop then it is quite obvious that it will take suppliers years everywhere else. But still BMW had been outsourcing; up to 80% of its parts Quinn(1999) which means this much percentage of parts were coming from suppliers.. So it can be concluded from this argument that BMW suppliers in Germany are very much developed and whenever they make a mistake BMW’s response to them is much more different then the suppliers in North America.

BMW Suppliers in North America were properly guided and they were made to see that it works in both directions so both of the supplier and customer have to build a relationship which works long-term; those suppliers were not only told by BMW that their processes needed some modification or they need to improve their processes to produce quality products like the suppliers in Germany but they were told every aspect of the product so that they can solve the problem; which gives the suppliers chance to provide

2.2.2 Supplier Performance:

BMW still relies and uses ‘Pareto-driven’ approach to assist its suppliers (Handfield cited et al. (2008:167). This analysis carried out gives them the details of the suppliers that which suppliers are performing well having the potential of development, or which of the suppliers are underperforming, supplying under-volume per commodity or per supply base, now this analysis simply leads to potential suppliers which are then chosen to do business with and it is very much obvious that a business group like BMW cannot be simply selecting suppliers compromising their quality, cost and customer.

2.2.3 Structure:

The major problem of BMW with its suppliers have been the issue of communication which means that the organisational structure of BMW is not feasible to cope with the supplier’s demands and needs; BMW follows a mechanistic or hierarchical structure where the power devolution is not from Top to Bottom and in these kind of organisational structure with the lack of proper communication these mechanisms come to a halt; in the view of the author this is what is happening at BMW they are still re-evaluating their processes and improve communication and team work, but they are not changing their structure.

2.2.4 Partnership:

Partnership with BMW is very unique; it helps suppliers in all possible ways however, Handfield (2008:167) argues “Bavarian Motor Works, BMW, the car manufacturer, does not provide financial support to suppliers, however it has provided the services of its employees when suppliers require assistance. BMW has sent maintenance engineers, procurement, logistics and quality personnel to suppliers-sometimes for several weeks at a time.” BMW apart from personnel support only provides the suppliers with the equipment to work on their products; which is also owned by BMW because being an OEM the parts should also be made with machines of the OEM.

There are four kinds of suppliers working in partnership with BMW.

1. Core Suppliers who are best-in-class of suppliers list, innovative, best processes; working in a long-term partnership with BMW or having mutual interests with BMW.

2. Concept Suppliers are the ones who have their main focus on innovation having potential of a very fair idea of what they are presenting to BMW because most of their new ideas come from their suppliers.

3. Series Development Suppliers are the suppliers which make sure about the existing concept (product) which BMW has and implementing is up to the mark.

4. Market Suppliers are the ones which are responsible for the standard parts supply for example nuts & bolts. (Weber 2009)

2.2.5 Supplier Development Activities:

The supplier development activities involve steps in which these processes excel and so does the supplier. According to Weber following are Supplier Development Activities at BMW.

1. Process Design includes the improvement of fundamental processes of suppliers and their performance. These processes include all kind of processes including business process