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Morristown, New Jersey October 12th, 2006
Discussion Document
Driving the Next Generation Purchasing Model
2
Executives are looking for the next generation sourcing model
Companies are not satisfied with the performance of their supply base and with the relationships that they have with their key suppliers
This is supported by our recent interviews with CPOs of major companies across the globe
– The role of the purchasing function will become more strategic (make vs. buy, large strategic partners, innovation etc.)
– Developing relationships with strategic suppliers is key
– The necessary capabilities are not in place
– The performance is not where it needs to be of key suppliers and how the OEMs / customers manage them
Quotes from interviews
– “Need to better leverage suppliers for innovation“, “Increased collaboration in Development“, “Increased need to cooperate, work together in R&D; need to be able to commit to suppliers”
– “Have the right intentions or the same goals on both sides”, “Clear strategic intent in regards to dependencies from both sides”, “Have skilled people to manage the relationship”, “Have a clear approach for how to manage a relationship“
3
Many suppliers mention Toyota and Honda’s cost-based approach as a superior and fundamentally different method of sourcing
Better understanding of supplier needs and economics– “Toyota uses its cost tables to make sure the suppliers don’t hide margin or exploit design changes”– “Toyota focuses on processes not piece price…their cost models are built on processes that actually
drive costs such as the number of stamping press hits”– “Honda cost estimators can tell you your own cost to within 1% accuracy”
More enduring relationships with fewer suppliers– “Toyota is very close to a partnership … they want the supplier to be successful”– “Toyota expects suppliers to make money”– “Suppliers are willing to go to extraordinary lengths to maintain that trust”
More design and program stability—set realistic program volume, price and cost targets before establishing specifications and costs for suppliers– “Big 3 make 8 to 10 design changes for each program; Toyota makes maybe 3”– “Toyota always meets or exceeds its volume commitments”
More reuse—components, architectures, platforms and technologies– “Toyota is creative about reuse, it knows when to customize, how much to customize and most
importantly when not to customize (develop new design)”– “Honda leverages re-use to an extreme”
Results in higher value—better speed, quality, and cost – “Toyota may even pay the same, but they get better value and reliability”– “The potential cost reductions with their approach are huge”
4
The benefits of Toyota’s model go beyond cost – Toyota consistently outperforms the Big 3 on JD Power’s quality metrics—20-30% fewer problems per
hundred
– Brand position is based on advantaged QRD
– In the mass market a strong brand results in superior purchase consideration
– Focuses on value to customers – functionality and quality
– …and typically realizes higher prices for comparable vehicles
– Higher retained value and lower operating costs more than account for Toyota’s price premium
Dealer interviews qualitatively confirm Toyota’s price premium– “Although Big 3 MSRPs may be higher, after incentives, owners pay significantly less for vehicles in the
same segment”
– “Buyers are willing to pay more for the Toyota brand across all segments”
– “Across the board, Toyota is simply regarded as a better vehicle: better initial quality, less service visits, more longevity, better fuel economy in most categories”
– “On average Toyota customers are better educated and earn more. They realize that over the long run, more money spent at the POS will be paid back in the realms of consumer confidence, reliability, and efficiency, not to mention the economics of a vehicle more in-demand come trade-in time”
Toyota has a significant cost advantage over the Big 3 in supplier costs in life cycle costs and in engineering
Toyota and Honda’s model is advantaged across multiple dimensions
5
Two different philosophies have been used to manage suppliers – price based and cost / performance based sourcing
Price Based Price Based
Tries to exploit the supply base as a market
Price based Looking for ways to get leverage on
suppliers to improve their negotiating position
Attempt to gain incremental improvement by switching suppliers
Arm’s length relationship Quickly switch suppliers for slightly lower
price Constantly market test pricing / quality Low trust between OEM and supplier Combative
Tries to exploit the supply base as a market
Price based Looking for ways to get leverage on
suppliers to improve their negotiating position
Attempt to gain incremental improvement by switching suppliers
Arm’s length relationship Quickly switch suppliers for slightly lower
price Constantly market test pricing / quality Low trust between OEM and supplier Combative
Cost/Performance BasedCost/Performance Based
Uses the supply base network as a key competitive advantage
Constant continuous improvement to eliminate waste in the entire supply chain
Integrated relationships Cooperative / knowledge sharing Sets and meets targeted / required cost
with supply partners Cost based Ensures supplier is at an advantage over
market Encourages and promotes competition for
technology, quality and cost through dual sourcing in the category
Uses the supply base network as a key competitive advantage
Constant continuous improvement to eliminate waste in the entire supply chain
Integrated relationships Cooperative / knowledge sharing Sets and meets targeted / required cost
with supply partners Cost based Ensures supplier is at an advantage over
market Encourages and promotes competition for
technology, quality and cost through dual sourcing in the category
Supply Base Philosophies
HONDA
6
The new purchasing operating model is based on three key pillars
Commitment to People Development
Respect to all people
Shift perspective/culture to support new operating model
Train people to see what is possible
Set incentives to encourage appropriate behavior
Commitment to understanding ideal performance and
eliminate waste Ideal cost
Zero defects
On-time delivery everytime
Valuing innovation
Awareness that ideal is not a standard, but a moving target based on physical realities
Commitment to Suppliers & Expectations from Suppliers
To mutually agree as to what is ideal performance
To mutually develop path to ideal performance
To drive continuous improvement based on physical realities
Build trust and long-term relationship with suppliers focused on performance
Strategic long-term partnership suppliers – strategic suppliers are a critical part of the extended enterprise and the customer’s success is interdependent on the suppliers success
Cost-based (not priced based) collaboration across supply chain to eliminate waste “Get it right the first time” – Collaboration with suppliers on product design to jointly reduce
waste and promote efficiencies & innovation Focus on continuous improvement in pursuit of ideal performance
New Purchasing Operating Model
7
The ideal performance based model creates the “right” supplier behaviors and a continuous learning cycle from product to product
A Learning Cycle From Program to Program
Agreed-to Cost
Model
SupplierQuote
Supplier Improvement
Program
Update Cost
Standards
IdealPerformance
Aligned BehaviorsAligned Behaviors
Establishes cost standards for major processes based on physical realities (e.g., injection molding cycle times) and for all elements of a component or system
Defines an ideal performance / cost to compare with the supplier cost
Creates a dialog around cost improvement ideas based on the supplier quote versus an ideal performance view
Drives to an agreement of real ideas that are developed into a full improvement plan
Updates cost standards based on reality changes and best costs
Uses sourcing as an opportunity to learn
– Understand costs in relation to realities (machines, people, processes, logistics, etc.)
– Improve standards toward global best / ideal performance
Learnings carried over to the next program – learning cycle
Establishes cost standards for major processes based on physical realities (e.g., injection molding cycle times) and for all elements of a component or system
Defines an ideal performance / cost to compare with the supplier cost
Creates a dialog around cost improvement ideas based on the supplier quote versus an ideal performance view
Drives to an agreement of real ideas that are developed into a full improvement plan
Updates cost standards based on reality changes and best costs
Uses sourcing as an opportunity to learn
– Understand costs in relation to realities (machines, people, processes, logistics, etc.)
– Improve standards toward global best / ideal performance
Learnings carried over to the next program – learning cycle
8
Cost standards are integral to the approach and are a powerful way of managing supplier target costs, year on year improvements and engineering changes
Cost StandardsCost Standards
There is a cost standard for each element in the pyramid
– The standards add up to the total cost / price much like a BOM
– This explicitly separates SG&A, markup and tooling
The inputs for each standard come from a combination of cost models / understanding, industry accepted costs / prices and observed prices. There are a number of different ways to develop a cost standard.
– Process and material based cost models
– Price tables
– Parametric feature based formulae
The standard for an input to the purchased product should be the same for any end product in which that input is used – for example, stampings, injection molding tooling, etc.
There is a cost standard for each element in the pyramid
– The standards add up to the total cost / price much like a BOM
– This explicitly separates SG&A, markup and tooling
The inputs for each standard come from a combination of cost models / understanding, industry accepted costs / prices and observed prices. There are a number of different ways to develop a cost standard.
– Process and material based cost models
– Price tables
– Parametric feature based formulae
The standard for an input to the purchased product should be the same for any end product in which that input is used – for example, stampings, injection molding tooling, etc.
System
SG&A / Markups
Base Tooling
Tooling Mods
Assembly
Comp Processes
Com
p 2
Pro
cess
es
Structure Assembly
Injection Molding
Processes Com
ponentsA
dditional Processes
Com
p M
ater
ials
Com
pone
nts
Com
p 2
Mat
eria
ls
Structure Processes
Structure Materials
Injection Molding
Materials
Total Purchased Part Cost
Markup and Tooling Costs
Input Costs
Conversion Costs
EXAMPLE COST ARCHITECTURE
9
Cost standards are built up from the physical “reality” of what is possible
Cost Standards are built from:
Supplier cost breakdown sheets
Supplier discussions
Industry data
Benchmarks
Competitive analysis
The cost standards are continuously updated based on new levels of performance
Cost standards are consistent in approach and format, and use common cost data
Required Input
Calculated Value
Red Text Looked Up Value
Unreclaim. Reclaim. Unreclaim. Reclaim.Part Unit Scrap Unit Scrap Unit Price/ Part Scrap Scrap
UOM or Mass or Mass or Mass UOM Cost Cost Cost/UOMUnit Of Measure a b c d a x d b x d e
- -
- -
MBF Part MBF Total Lifetime Tooling Total Cost/ Cycle Cost/ Tooling Part Cost/ MBFT
Hr Time (Hr) Part Cost Volume Part Costa b c d e f = d / e c + f
- - - - - -
-
Sales, General, and Administrative
Design Engineering
Profit
Profit (%) Commensurate w/global best industry levels, but more is acceptable if competitive overall
Subtotal E:
Profit Comments/InformationTotal Profit/
Part ($)
Subtotal E1: -
Commensurate w/design service level
Volume Part ($)(a x b) / c
-
a b c
Commensurate w/global best industry levels, but also consider level of service provided
Design/Development Type
Total Design/ Design/Development Lifetime Total Design Eng./Development Hrs Cost/Hr
Comments/Information
Subtotal D:
Markups/Design Engineering Cost
Sales, General, and Administrative Comments/InformationTotal SG&A/
Part ($)SG&A (%)
Optimum for part size/volume
Optimum for part size/volume
Subtotal C: -
Machines/Buildings/Facilities/Tooling Cost
Operation Description Tooling TypeComments/Information Machine Size & Type
- Optimum labor/machine mix
Cost Model:Cost Model Type:
Cost/Hr
- Optimum labor/machine mix
Cycle Time (Hr) Labor Cost/Part ($)Operation Description Comments/Info a b c a x b x c
Per OperationLabor Classification
Labor Cost# of People Loaded Labor Part Total Direct
Subtotal A: -
Component 3 Optimum mat'l to meet spec -
Total Matl.Cost/Unit
[(a + b ) x d] + (c x e)
Component 1 Optimum mat'l to meet spec -
Year 1 Volume:
Supplier Mfg. Location: Required Capacity:
Part Number: Program Life:
Revision Level: Payment Terms:Part Description: Delphi Plant Location:
Supplier: Units (Metric/English):
Raw Material Cost
Component Part Description Comments/InformationMaterial
Description
Model Revision Level:
Year 2 Volume:Year 3 Volume:
Lifetime Volume:Year 4 Volume:
Part Information
A B
C
D
Part InformationPart Information
Material CostsMaterial Costs
Labor CostsLabor Costs
Capital Costs Capital Costs
Overhead CostsOverhead Costs
ProfitsProfits
10
One way to build ideal costs is from process based cost standards that capture best-in-class costs and help estimate component cost
CLIENT EXAMPLE
CLIENT EXAMPLE
11
Knowledge is captured on an on-going basis across the global organization to provide deep insight into material costs and conversion costs ...
Cost Target
Material Description Roll Widthmm
Cost(/m2)
Vinyl 315 Expanded w/knitw/non woven 1000
Hannah 3mm Lamination 1500
2mm Lamination 1500
non Lamination 1500
Duon 4.1oz2.7oz
15001500
Tyler 3mm Lamination 1500
non Lamination 1500
New Low Cost Fab non Lamination 1500
Hampton 2mm Lamination 1500
non Lamination 1500
Example: Material Cost Targets
Example: Material Yield Ratio Targets
Cost Target
Process Description Unit Cost
Cutting Fabric
10mm lamination Piece
5mm lamination Piece
3mm lamination Piece
non lamination Piece
Cutting Duon Piece
Cutting Vinyl Piece
Cutting Carpet Piece
Cutting Pad Piece
Sew Listing pocket M
Sewing Fabric (thread included)
Join Sew M
Top Sew M
W/P Sew M
Tack Down M
Sewing Leather (thread included)
Join Sew M
Top Sew M
W/P Sew M
Tack Down M
Fabric Utilization %
Example: Process Cost Targets
Component Target Yield %
FSB 94.00%
FSC 97.00%
RSB (split) 94.00%
RSB (bench) 94.00%
RSC (split) 97.00%
RSC (bench) 97.00%
Pour in Place 90.00%
Headrest 94.00%
Armrest 97.00%
12
… as well as applicable SG&A, base tooling, tooling modifications and acceptable mark-ups
Item Description Target
Tier 1 SGA&P, Direct Supply, In-bound Freight, Inter-Company & V-V
CSP & Self Procurement
RDDP Volume <100k Units Annually
Volume 100k to 249k Units Annually
Volume >250k Units Annually
Tier 2 Now included in the Cost Standards
Mark Ups - SeatType of
ModificationContents of Part Change Size of
ChangeModification
Cost
Add Pin or BossNew Adoption ~30mm
Location Change ~30mm
Drilling HoleNew Adoption
Location Change
Clip BaseNew Adoption ~30mm
Location Change ~30mm
Clip Post Shape Change ~10mm
Rib Change
New or Heighten (burn) and Abolish (weld)
>200mm
100-200mm
<100mm
Shorten (weld & burn)
>200mm
100-200mm
<100mm
Edge Shape Change
Extending or Reducing
>200mm
100-200mm
<100mm
Thickness
>200mm
100-200mm
<100mm
Addition of Radius
>100m
50-100mm
<50mm
Tooling Modification Cost Targets – Injection Molding
Blank Size Cost Target – by Process
Feeder Blank Bend Draw
10,000
20,000
30,000
45,000
60,000
80,000
110,000
140,000
180,000
230,000
Standard price of Cam
Type W<150mm 150 - 500
Single
Double
Transfer Die Cost Targets – Base Tooling
13
The same cost table approach is used to manage engineering changes and to avoid cost walk-ups by the supplier
$ / Car
SOP
Actual material costs
7 %
Target costs
EXAMPLE
Statusat SOP
RevisedTarget
PRODUCT COST EVOLUTION
Time
OriginalTarget
13 %
14
The ultimate goal of understanding ideal performance is to engender a continually learning organization
Ideal performance is a constantly moving target
– Innovations, new processes, materials, new designs are constantly improving performance– Cost management is a constant quest to understand ideal– New process choices or improvements must always exceed the performance of their
predecessors – and this will be reflected in costs that can only get better
Forces engineers, purchasing and suppliers to learn and understand underlying drivers of costs
– Allows for what if scenarios
– Places focus on major cost drivers
– Enables engineering teams to make value / cost trade-offs
– … and improve product design during engineering
Enables productive dialogue between the supplier and the customer to jointly reduce waste / cost
15
Annual development plans are used to foster mutually beneficial long term supplier relationships that result in an advantaged supply base
Focus is on longer term, trusting, supportive relationships where customer and suppliers are both committed to helping each other succeed (i.e., everybody profits)
Data and fact driven expectations set annually, rather than negotiations or LTAs with simple year-over-year improvements written into the contract
– Price tables and cost models to truly understand drivers of supplier’s product/process costs
– Target prices based on price tables and cost modeling
– Productivity and VA/VE cost improvements addressed separately
– Comprehensive explanations of how price, delivery, and quality targets were derived
– Assistance from customer to help suppliers achieve targets and tackle tough issues
– Supplier receives reasonable margin and customer receives reasonable price
– Supplier and customer share in investments and benefits from supplier’s breakthrough improvement ideas
The customer dedicates sufficient resources to gain a deep knowledge of their suppliers’ industries, including production processes and technologies
16
The cost methodology helps to establish an open dialog with suppliers, resulting in more effective improvement plans at both the product and supplier enterprise levels
IMPROVEMENT PLAN
Document the ideal cost for each cost element
Determine each supplier’s gap to the ideal
Identify enablers to reduce suppliers gaps
Building creative improvement plan for enablers
Cost Element Ideal Cost Supplier Quote Gap to Ideal Enablers to Lower Cost (Reality Changes)
Raw Materials 2.00$ 2.50$ 0.50$ Reduce Scrap, Leverage Material Buy
Purchased Parts 0.75 1.00 0.25 Leverage Material Buy, Redesign, Reduce Scrap
Labor 1.50 2.00 0.50 Increase Labor Utilization, Automate, Low Cost Ctry
Machines 2.00 2.50 0.50 Increase Machine Efficiency, Tooling Optimization
SG&A 1.00 1.25 0.25 Reasonable Level / Management Efficiency
Profit 1.00 1.00 - Reasonable Level for Industry / Services Provided
Total Cost 8.25$ 10.25$ 2.00$
YYYPartsYYYParts
QUALITYQUALITY
T-1 PerformanceT-1 Performance
TargetTarget ResultResult
Year T TargetYear T Target
GoalGoal StretchStretch
Defects/MillionDefects/Million 3030 158158 5050 <30<30
Critical Field ProblemsCritical Field Problems 00 00 00 00
DELIVERYDELIVERY
On Time PerformanceOn Time Performance 100%100% 100%100% 100%100% 100%100%
Mixed KanbansMixed Kanbans 00 00 00 00
COSTCOST
MaterialMaterial 2%2% 2%2% 4%4% 4%4%
Manufacturing ImprovementManufacturing Improvement 4%4% 4%4% 3%3% 4%4%
XXXPartsXXXParts
QUALITYQUALITY N/AN/A N/AN/A N/AN/A N/AN/A N/AN/A
DELIVERYDELIVERY Performance RatioPerformance Ratio 100%100% 100%100% 100%100% 100%100%
PrototypeParts
PrototypeParts
QUALITYQUALITY PPIRPPIR N/AN/A N/AN/A N/AN/A N/AN/A
DELIVERYDELIVERY Performance RatioPerformance Ratio N/AN/A N/AN/A N/AN/A N/AN/A
Develop ProductDevelop Product
CYCLE TIMECYCLE TIME MonthsMonths 2020 2222 2020 1818
Program Based
Supplier Annual Plan
17
Individual supplier expectations for the year include corporate-, plant- and part- level targets
Client NameINDIVIDUAL SUPPLIER EXPECTATIONS
Parts & Components
2004 Customer Value Improvement Target2004 Customer Value Improvement Target
Text Box for Value Improvement Target (VE/VA)Text Box for Value Improvement Target (VE/VA)
Tier II Minority Sourcing TargetTier II Minority Sourcing Target
5%(Measurement of Total Purchases for Customer)
5%(Measurement of Total Purchases for Customer)
2004 Customer Warranty Target2004 Customer Warranty Target
X PPMX PPM
Supplier Environmental Program RequirementsSupplier Environmental Program Requirements
ISO 14001 Certification by 12/31/05ISO 14001 Certification by 12/31/05
Individual Expected Tasks (IETs)Individual Expected Tasks (IETs)
ILLUSTRATIVE
ILLUSTRATIVE
Corporate-Level TargetsSupplier Name
Supplier Code: XXXX
Plant-Level TargetsSupplier Name
Supplier Code: XXXX
PlantCodePlantCode CommodityCommodity
QualityQuality
OE Target
OE Target
Service Target
Service Target
Prototype Target
Prototype Target DeliveryDelivery
XXX-XXXX-X XYZXYZ XXXX XXXX O PPIRO PPIR100% On-time Delivery/Zero
Mixed Kanbans
100% On-time Delivery/Zero
Mixed Kanbans
XXX-XXXX-X XYZXYZ XXXX XXXX O PPIRO PPIR100% On-time Delivery/Zero
Mixed Kanbans
100% On-time Delivery/Zero
Mixed Kanbans
XXX-XXXX-X XYZXYZ XXXX XXXX O PPIRO PPIR100% On-time Delivery/Zero
Mixed Kanbans
100% On-time Delivery/Zero
Mixed Kanbans
XXX-XXXX-X XYZXYZ XXXX XXXX O PPIRO PPIR100% On-time Delivery/Zero
Mixed Kanbans
100% On-time Delivery/Zero
Mixed Kanbans
XXX-XXXX-X XYZXYZ XXXX XXXX O PPIRO PPIR100% On-time Delivery/Zero
Mixed Kanbans
100% On-time Delivery/Zero
Mixed Kanbans
XXX-XXXX-X XYZXYZ XXXX XXXX O PPIRO PPIR100% On-time Delivery/Zero
Mixed Kanbans
100% On-time Delivery/Zero
Mixed Kanbans
XXX-XXXX-X XYZXYZ XXXX XXXX O PPIRO PPIR100% On-time Delivery/Zero
Mixed Kanbans
100% On-time Delivery/Zero
Mixed Kanbans
Part Number
Part Number
XXXXXXXXXX
ProjectProject
XXXXXXXX
Target (Piece Price + Tooling)Target (Piece
Price + Tooling)
$XX.XX$XX.XX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXX $XX.XX$XX.XX
XXXXXXXX $XX.XX$XX.XX
XXXXXXXX $XX.XX$XX.XX
XXXXXXXX $XX.XX$XX.XX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXX $XX.XX$XX.XX
XXXXXXXX $XX.XX$XX.XX
XXXXXXXX $XX.XX$XX.XX
XXXXXXXX $XX.XX$XX.XX
XXXXXXXX $XX.XX$XX.XX
XXXXXXXX $XX.XX$XX.XX
XXXXXXXX $XX.XX$XX.XX
XXXXXXXX $XX.XX$XX.XX
XXXXXXXX $XX.XX$XX.XX
XXXXXXXX $XX.XX$XX.XX
XXXXXXXX $XX.XX$XX.XX
XXXXXXXX $XX.XX$XX.XX
XXXXXXXX $XX.XX$XX.XX
XXXXXXXX $XX.XX$XX.XX
XXXXXXXX $XX.XX$XX.XX
XXXXXXXX $XX.XX$XX.XX
XXXXXXXXXX XXXXXXXX $XX.XX$XX.XX
Part-Level TargetsSupplier Name
Supplier Code: XXXX
Examples of Supplier Targets at Corporate, Plant, and Part Level
18
Another important aspect of the supplier development process is supplier feedback on what the customer should do differently
Deterioration in a Customer Program Economics from Award to Launch Due to Design Churn
Tooling($MM)
$10
$13
$0
$2
$4
$6
$8
$10
$12
$14
Award SOP
+ 30%
Piece Part Cost ($)
$200
$240
$0
$50
$100
$150
$200
$250
$300
Award SOP
+ 20%
Sets unrealistic expectations for vehicle price point, feature content, cost and margins that must be reconciled during detailed design
Decisions made by strong functional chimneys create infeasible solutions that have to be undone
Although each function acts rationally, the result is a “random walk” of requirements on the supplier
Continue to make changes late in the process to accommodate unforeseen or unresolved engineering issues
Additional revisions to the product drive incremental ER&D costs
Concept Development
Detailed Design
Design Verification &
Prototype Testing
Drivers of “Churn” by Development Stage
Illustrative
Illustrative
19
For each category, the ideal supply chain structure will also be defined
Right PlantRight Plant
Structural:
30-50 presses to achieve operating efficiency
85% utilization
$60 – 80 million sales
We are 30% of each plant’s business
Participate in cooperative resin purchasing
Focus on design to cost as opposed to annual productivity improvements
Operating:
Operational focus => single process, low number molds, resins, end products
Lean operations and pull system
Latest cavity sensors
Latest process controls
Common presses and secondary equipment
IT:
Systems capable of efficient interface
Structural:
30-50 presses to achieve operating efficiency
85% utilization
$60 – 80 million sales
We are 30% of each plant’s business
Participate in cooperative resin purchasing
Focus on design to cost as opposed to annual productivity improvements
Operating:
Operational focus => single process, low number molds, resins, end products
Lean operations and pull system
Latest cavity sensors
Latest process controls
Common presses and secondary equipment
IT:
Systems capable of efficient interface
Right NetworkRight Network
Suppliers aligned by segment – more than 1 supplier per segment to ensure competitive tension
Distributed geographical network to support Midwest, South East US and Mexican demand
Tight integration of design, molding and tooling
>80% of sales to auto industry
Suppliers extremely capable at a few process technologies but each plant is focused
Design engineering and testing capabilities – design experimental technical facility
Mold and process capability
Common presses and secondary equipment across plants
Robust capacity planning capabilities
Own some tooling capability, strategic alignment with tooling manufacturers
Suppliers aligned by segment – more than 1 supplier per segment to ensure competitive tension
Distributed geographical network to support Midwest, South East US and Mexican demand
Tight integration of design, molding and tooling
>80% of sales to auto industry
Suppliers extremely capable at a few process technologies but each plant is focused
Design engineering and testing capabilities – design experimental technical facility
Mold and process capability
Common presses and secondary equipment across plants
Robust capacity planning capabilities
Own some tooling capability, strategic alignment with tooling manufacturers
20
The first step is to evaluate how the supplier’s present manufacturing footprint affects their competitive position and assess the gap to ideal
Scale(Avg. Capacity by Plant)
270
305
340
315
295
220 270 320 370
Supplier 0
Supplier 1
Supplier 2
Supplier 3
Supplier 4
Factor Costs(Avg. Labor Costs w/ 100% = Germany)
85%
89%
65%
76%
82%
60% 70% 80% 90%
Supplier 0
Supplier 1
Supplier 2
Supplier 3
Supplier 4
77
105
98
102
110
70 80 90 100 110 120
Supplier 0
Supplier 1
Supplier 2
Supplier 3
Supplier 4
Complexity(Weighted Plant Avg. Produced Units / Model)
Flexibility(Weighted Plant Avg. of Models per Line)
1.67
2.55
2.05
2.35
2.45
1.5 2 2.5 3
Supplier 0
Supplier 1
Supplier 2
Supplier 3
Supplier 4
EXAMPLE EXAMPLE
Too many sitesToo many sites
No clear focus of sites
No clear focus of sites
Too few low cost sitesToo few low cost sites
No flex-technology for optimized utilization
No flex-technology for optimized utilization
21
You then build an ideal supply network footprint by segment – and understand how the suppliers fit with this
Rationale Rationale
Total spend: 123M
Ideal plant scale: $70M
Our share: 50%
Each plant is $35M spend
Total spend: 123M
Ideal plant scale: $70M
Our share: 50%
Each plant is $35M spend
Ideal Supply Network for PrecisionIdeal Supply Network for Precision
Number of Plants:3 - 4
Footprint:– MI (2 plants)– IN (1 plant)– Mexico (potentially 1 plant if justified by
increasing volume)
Number of Plants:3 - 4
Footprint:– MI (2 plants)– IN (1 plant)– Mexico (potentially 1 plant if justified by
increasing volume)
0.0
1.0
0.1
4.3
0.5
0.0
0.0
2.2
6.0
10.2
0.3 5.9
0.0
15.0
1.0
Precision Molding
EXAMPLEEXAMPLE
22
This approach achieves significant performance improvements
Sources of Injection Molding Savings Compared to Current Supply Base
(1%)
100%
(2-5%)(1%)
(2-4%)
(1%)
3%
(5%)
(4%)
(1%)
Current
Purch
asing
Sca
le
Bulk D
eliver
y
Facilit
y Sca
le
Focus
Plan
t
DL to IL
Rat
io
Overh
ead
Utiliza
tion
Scrap
Man
ning
Idea
l Plant
Short Term Medium Term
4-9%
10%
19%
Engineering capability at
supplier
Mold change technology, IL skills and simple flows are
key enablers
30-50 presses
23
Supplier and customer improvement opportunities are combined to establish a joint agenda to deliver results
Op
po
rtu
nit
y A
rea
TechnologyTechnology
Design Trades
Engineering Integration
Early Supplier Involvement
Concept Definition
Engineering Capability Maturity
Benchmarks
Global Footprint
Part Ordering and Delivery
Design-Driven Cost Reduction and Reduction of Functional Test
Requirements
Service PartsJoint
Sourcing Leverage
Engineering Competency Assessment
Dealer Delivery
Early Stage Effectiveness and Efficiency
1 2 5
11 16
3
4
6
7
8
9
12
Advantaged Network
10 14 15
Transaction Efficiency
13
Process Effectiveness
321Identifies opportunities to leverage and support joint marketing
MaturityBoeing Rates Suppliers
321Shares IRAD project lists with Prime for rating
321Supports common T&Cs
321Routinely responds to support customer’s timing requirements
Bid and Proposal
321Resets IRAD priorities based on joint technology sessions
321Reports IRAD funding that is applicable to Boeing programs
321Engages in joint technology review sessions
R&D:
RatingsAttributes
321Identifies opportunities to leverage and support joint marketing
MaturitySupplier
321Shares IRAD project lists with
321Supports common T&Cs
321Routinely responds to support customer’s timing requirements
Bid and Proposal
321Resets IRAD priorities based on joint technology sessions
321Reports IRAD funding that is applicable to Boeing programs
321Engages in joint technology review sessions
:
RatingsAttributes
Performance Metrics
Supplier Metrics/ Targets (Need to be confirmed with Suppliers)
Supplier Metrics/ Targets (Need to be confirmed with Suppliers)
R&D applicable to Customer (% of revenue)2005 Targets
3%
R&D applicable to Customer (% of revenue)2005 Targets
3%
Development - % on time:100%
Development - % on time:100%
Sourcing – Ave Material cost reduction (2003 vs. 2002):5-10%
Sourcing – Ave Material cost reduction (2003 vs. 2002):5-10%
Manufacturing
Supplier Inventory Turns: 6-10
Average supplier lead time: 3 Months
Annual Lead time improvement: 15%
Annual Value Added Productivity Improvement:3-5%
Manufacturing
Supplier Inventory Turns: 6-10
Average supplier lead time: 3 Months
Annual Lead time improvement: 15%
Annual Value Added Productivity Improvement:3-5%
Service - Average Repair turn-around (lead) time:30 Days
Service - Average Repair turn-around (lead) time:30 Days
Joint Improvement RoadmapArea Party Description Timing Owner Status
ESI Supplier A
Recent pricing / quotes have been systematically high compared to the cost tables, resulting in lost business — define plan for reaching competitive cost levels
Demonstrate tangible changes to impact cost levels
John Smith
Eng
OEM
Engage Supplier A in electronics study Respond to part redesign proposal Engage site XYZ. in bid for interface units
Bill Williams
Supplier A Use May 5th meeting to submit design driven cost reduction ideasJohn Smith
Mfg
OEM
Develop timeline for conducting lean assessment at DEF, HIJ, KLM & ABC Fix XYZ SPMS data (currently shows red – issue is customer service not XYZ
manufacturing) Move subassembly to China by year end
Supplier A
Create plan to execute lean assessments for all facilities (present status at May 5th meeting)
Work to bring resolution to ABC and XYZ technical, quality, and business issues Complete make / buy and consolidation analyses for machining and board
stuffing (all plants) operations
John Smith
Service Supplier A Improve dealer shipment cycle timesBill
Williams
Improvement Levers & Diagnostics
Joint Improvement Roadmap
24
Involving suppliers early in development is key to leverage the total cost structure and suppliers’ innovation capabilities
Product Cost structure
Potential Activities
0%-5%0%-5%
40%40%
20%20%
5%5%
30%-35%30%-35%
Margin
PurchasedCost
Manufacturing
Engineering
OverheadOthers
Design of
the product
Purchasing alone Commercial negotiations can
only attack the tip of the iceberg
Typical CostBreakdown
Purchasing supported by Engineering
Improved cost of product
Improved functionality
Supplier integrated with a cost and revenue perspective
Bring new technology
Accelerate product to market
Share customer understanding
25
Involving suppliers in innovation will allow the organization to access a larger pool of opportunities in achieving target product costs
Design
TechnologyImprovements/Advancements
Re-Sourcing
Price Negotiation
45%
22%
17%
16%
Breakdown of Savings by Source(Client experience)
26
Toyota’s commitment to understanding product costs at a process level started as a way to support early product development cost/value trade-offs
LaunchLaunch
Product DefinitionProduct
Definition
Brand, Design,
Marketing
Technical Concept
Technical Concept
Engineering
Business Case
Business Case
Finance, Purchasing,
Chief engineer
DevelopmentDevelopment
Engineering
GoAhead
Decision
GoAhead
Decision
Development Process
Engineering owns cost target and drives achievement together with Purchasing Functional requirements instead of over-engineering Cost management (Value analysis, trade-off management etc.)
Cost Engineering
Benchmarking of requirements, options & features Cost reduction ideas & implementation support Concept competition during sourcing process from preferred
suppliers
Cost Engineering
Supplier Involvement
COST TARGETVEHICLE PROFIT
Value: High in marketCost: Minimize No over-specifications No cost increase after
contract signing Product cost target
achieved at launch
27
We see a number of levers that take the supplier early involvement process to the next level
Establishment of joint technology roadmaps
– Done for the top tier of high performance, high innovation suppliers
– Review and influence the supplier’s product development / innovation plan
– Co-ordinated with the customer’s product plan so that innovations are available to plug and play
– Innovations may be exclusive to the customer for a period of time, say six months
Driving early innovation competitions with 2-3 suppliers on design intensive systems, subsystems and components to access the best supply base thinking before locking in the design and cost
Tapping into the suppliers’ insights into end customer preferences on key areas to create end consumer value
– Many suppliers have extensive consumer knowledge built up across customers
– Represents an opportunity to optimize the consumer value / cost curve
Use of cost tables to work true design specification / cost trade-offs and not just design specification / price trade-offs as is done today
Leverage the supplier’s product architecture intelligently to reuse existing product that the supplier has or design in high volume, cross-customer part standards
28
One client recently reviewed the innovation plans of three important suppliers, producing significant benefit in terms of supplier focus and program alignment
Programs Rated Supplier R&D on Importance and Overlap
R&D Project NameR&D Project Name
SUPPLIER
EXAMPLESUPPLIER
EXAMPLE
Tech Maturity
Tech Maturity
Composite Ranking
Composite Ranking A1 ViewA1 View A2 ViewA2 View A3 ViewA3 View A4 ViewA4 View A1 OverlapA1 Overlap A2 OverlapA2 Overlap A3 OverlapA3 Overlap A4 OverlapA4 Overlap
Technology Focus Area 1Technology Focus Area 1
Project 1Project 1 99 HighHigh MediumMedium MediumMedium MediumMedium HighHigh MediumMedium MediumMedium
Project 2Project 2 99 HighHigh MediumMedium MediumMedium MediumMedium HighHigh HighHigh MediumMedium MediumMedium
Project 3Project 3 LowLow 99 HighHigh MediumMedium MediumMedium MediumMedium HighHigh HighHigh MediumMedium MediumMedium
Project 4Project 4 MediumMedium 77 No RatingNo Rating MediumMedium HighHigh MediumMedium MediumMedium
Project 5Project 5 77 HighHigh MediumMedium No RatingNo Rating MediumMedium HighHigh HighHigh MediumMedium MediumMedium
Project 6Project 6 HighHigh 55 No RatingNo Rating MediumMedium MediumMedium LowLow HighHigh
Project 7Project 7 HighHigh 44 No RatingNo Rating MediumMedium No RatingNo Rating MediumMedium MediumMedium
Project 8Project 8 HighHigh 44 No RatingNo Rating MediumMedium No RatingNo Rating MediumMedium HighHigh MediumMedium
Project 9Project 9 HighHigh 33 No RatingNo Rating LowLow No RatingNo Rating MediumMedium MediumMedium
Project 10Project 10 22 No RatingNo Rating LowLow No RatingNo Rating LowLow
Project 11Project 11 LowLow 22 No RatingNo Rating LowLow No RatingNo Rating LowLow
Project 12Project 12 22 No RatingNo Rating LowLow No RatingNo Rating LowLow
Project 13Project 13 HighHigh 22 No RatingNo Rating LowLow No RatingNo Rating LowLow
29
CustomRFP
OEM Evaluates
Responses
Typical OEM Drafts RFP
Suppliers Respond to
RFI
Type 1 Single RFP
Type 2 Supplier Bid List
Developed
Type 3
New Contract Award
Select Second Source
Success
Failure
Development Phase
Component Spec
Architecture
Component Spec
Functional Requirements
Component Spec
Component SpecIdentify System
to be Redesigned
Contract Award
Contract Award
Contract Award
RFIRound table
Round table
RFI
RFI
Review
BTP
BTP
BTP
BTP
RFP
Down-select
CustomRFP
Pick Key Suppliers
Surfacing alternative design concepts from suppliers is a major lever– funding the design activity separately from production can have merit
ALTERNATE ESI / RFP PROCESSES
30
$6.86 $7.06
$7.91$8.35
$5.99
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
A B C D All
Unit Cost
Cross-OEM Cost Savings Potential:Component XX2004
ProgramsComponent
Volume
5
1
730,000
4
1
600,000
1
1
375,000
1
1
300,000
11
1
2,015,000
Cost with a cross-VM approach
VM #3VM #3
Seat B.O.M.Seat B.O.M. Small CarSmall Car
Frame
Mechanism
Trim
Foam
Frame
Mechanism
Trim
Foam
Part #15
Part #16
Part #18
Part #20
Part #15
Part #16
Part #18
Part #20
Large CarLarge Car
Part #2.v2
Part #17
Part #19
Part #21
Part #2.v2
Part #17
Part #19
Part #21
VM #2VM #2
Seat B.O.M.Seat B.O.M. Small CarSmall Car
Frame
Mechanism
Trim
Foam
Frame
Mechanism
Trim
Foam
Part #8
Part #9
Part #11
Part #13
Part #8
Part #9
Part #11
Part #13
Large CarLarge Car
Part #2
Part #10
Part #12
Part #14
Part #2
Part #10
Part #12
Part #14
VM #1VM #1
Seat B.O.M.Seat B.O.M. Small CarSmall Car
Frame
Mechanism
Trim
Foam
Frame
Mechanism
Trim
Foam
Part #1
Part #3
Part #5
Part #7
Part #1
Part #3
Part #5
Part #7
Large CarLarge Car
Part #2
Part #4
Part #6
Part #7
Part #2
Part #4
Part #6
Part #7
Re-Use Within And Across Customers
Suppliers can leverage both
within AND across VMs
“Intelligent architecture” is the process of working with suppliers to leverage cross-customer scale
31
Example …
Design Re-Use Example Clusters
32
People development and hiring is a major part of the transformation to the new sourcing model since the required skills are different
Insight and knowledge to know what well run facilities look like
Aptitude to develop and apply cost tables, models and understanding
Capacity to drive continuous improvement with a constant focus on removing waste
Ability to recognize competitive suppliers who can also continually improve upon performance
Effectiveness in interfacing with engineering and product planning
Recognition of inherent benefits of stability in design specification and demand
A focus on productivity improvements separately from VA / VE improvements
Ability to help suppliers drive the identified performance improvements
Critical Skills in the New Purchasing Model
33
Aligning metrics – both within the Purchasing organization and how Purchasing is measured – requires a true paradigm shift
Common / Traditional Purchasing MetricsCommon / Traditional Purchasing Metrics
Piece price savings typically the key metric for most of Purchasing
Purchasing held responsible for material cost, Engineering for design/quality
Savings generally price-based and do not consider model-to-model improvement / low cost design upfront
Price and negotiation-based metrics create incentive for wrong behavior (start with less than ideal design / cost and negotiate to reduce price)
Piece price savings typically the key metric for most of Purchasing
Purchasing held responsible for material cost, Engineering for design/quality
Savings generally price-based and do not consider model-to-model improvement / low cost design upfront
Price and negotiation-based metrics create incentive for wrong behavior (start with less than ideal design / cost and negotiate to reduce price)
New MetricsNew Metrics
Focused on performance relative to ideal, and improvement against it
Key dimensions include cost, quality, delivery, innovation
Engineering and Purchasing are both responsible – and accountable – for achieving material cost targets
Price-to-price savings are down played
Focused on performance relative to ideal, and improvement against it
Key dimensions include cost, quality, delivery, innovation
Engineering and Purchasing are both responsible – and accountable – for achieving material cost targets
Price-to-price savings are down played
Roadblocks and Challenges
Often the best performers under the traditional system are most resistant to change
– As the new approach no longer focuses on price reductions, it appears to question earlier successes
– Tough negotiation skills are no longer the key success factor
Traditional leadership expectations of Purchasing, Engineering, Finance and Sales all need to change to drive a paradigm shift top-down throughout the organization
34
Measuring yourself and the supply base against this ideal performance is a key element of this shift in philosophy
CLIENT EXAMPLE
CLIENT EXAMPLE
Price
Quoted Price
Cost Modeled
Ideal
Time(in years)
1 2 3
Ideal Cost Target
$2.35 Targeted
$2.69
$2.55
$2.43
$2.30
$2.17
$1.49
5%
5%
5%
Agreed Cost with Supplier Improvement
Plan
Agreed Cost with Supplier Improvement
Plan
Part XXX
Traditional Metrics:Price-to-Price Savings
New Metrics:Performance Vs. Ideal
Cost / Price Reduction Needs To Be Based On Reality Changes
Cost ElementIdeal Cost
Supplier Quote
Gap to Ideal
Enablers to Lower Cost (Reality Changes)
Raw Materials 2.00$ 2.50$ 0.50$ Reduce Scrap, Leverage Material Buy
Purchased Parts 0.75 1.00 0.25 Leverage Material Buy, Redesign, Reduce Scrap
Labor 1.50 2.00 0.50 Increase Labor Utilization, Automate, Low Cost Ctry
Machines/Building/ Facilities/Tooling 2.00 2.50 0.50
Increase Machine Efficiency, Tooling Optimization
SG&A 1.00 1.25 0.25 Reasonable Level / Management Efficiency
Profit 1.00 1.00 - Reasonable Level for Industry / Services Provided
Total Cost 8.25$ 10.25$ 2.00$
In the new model, price reductions without underlying cost improvement, i.e., “reality changes”, are not enduring
The new metrics are thus based on how close cost and reality are to the ideal
Improvement
35
This new model requires a fundamental shift in mind set
TODAY TOMORROW
Price based supplier competition
– Typical supplier practice of bidding at or below cost because it intends to make it up on changes
– So many suppliers that the focus must be on managing transactions and emergencies
– Organization mindset of frequent bidding and supplier churn
– Hard to enter into collaborative relationships
LTAs with built-in YOY or PO to PO price reductions
– Incentives based on year over year reduction
– Difficult to understand levels of competitiveness for productivity, materials, and engineering
– Arguably, suppliers attempt to incorporate LTAs in price
Frequent price based negotiations, often contributing to combative interactions
Continuous improvement through elimination of waste – and knowing where waste is
– Advantaged network and footprint
– Set and meet targeted / required cost reductions with suppliers
– Targets for productivity, material, and engineering improvements set and monitored separately
Reality-based cost standards, models, and understanding are critical tools for moving to advantaged supplier model
Suppliers are compared to best ideal costs program by program and evaluated at least each year, and targets are set accordingly
– Cost, quality, and delivery based improvement targets
– Ensure supplier is advantaged over market, and know what is ideal
– Integrated relationships and cooperative / knowledge sharing
