Facilitating the Change from Adversary to Partner
The Evolution in Auto Industry Supplier-Customer
Relationships
Bob Maks, V.P., Cost Engineering, Advanced Purchasing Dynamics
[email protected] 248-701-2839
Advanced Purchasing Dynamics, Inc.
705 South Main Street, Suite 260, Plymouth, MI 48170 I www.apurchasingd.com I (743) 927-0836
Agenda
Introduction
Understand why manufacturing cost knowledge is important
Overview what we are seeing in the industry
Introduction to the cost transparency curve
Developing Open Book Cost Models
Present self assessment tool
2
Background
Bob Maks
Vice President, Cost Engineering
+25 years Sales and Supply Chain with Large Tier I’s
Federal-Mogul
Freudenberg-NOK
Lear
Visteon
Global Experience: Direct and Indirect Procurement
Consulting
Transparency and Cloud Solutions
Cost Engineering
Training
Service Delivery &
Optimization
Placement
4
APD Portfolio
Transformation/History
5
Jeoff Burris Founder and Principal Ford Motor, Metaldyne, Intier Purchasing Industry Leader with Substantial P&L Experience
Knowledge based approach to purchasing Data driven approach to purchasing Make solutions broader to manufacturing
Today2004
Innovation Phase
ConsultingTraining
Off-Shoring
TaaS
Placement
CloudCost Engineering
Strategy
9
Provide all essential tools for a knowledge based collaborative approach to purchasing
Enable organizations to take ownership of proven purchasing processes
Tailored sequence and delivery of tools with support for each customer to maximize ROI
Processes designed for minimum disruption and easy adoption
Open Book
Pre Sourcing Concepts
TransparencyLead Buyer
Concept
Strategic Supplier
Analytics
Should- Cost Models
Industry Buzz
Fundamental objectives of strategic sourcing:
Identify Needs
Sourcing Strategy
Bid Process Bid Analysis ContractSupplier Management
Understand – Analysis of needs, markets, suppliers, competitors, capabilities
Decide – Determine opportunity to pursue, develop sourcing strategy, evaluate suppliers, negotiate, analyze results
Manage – Award business, complete contract, establish expectations, monitor performance
DRIVES VALUE INTO THE BUSINESS!
Why Manufacturing Cost Knowledge is Important
Competition Collaboration
Since the 1980’s the relationships in manufacturing supply chain have shifted between competition and collaboration
Competition/Collaboration Pendulum
Competition Collaboration
1980’s: End of Post WWII Boom
Creates the need to reduce supply base to deal with complexity
Union/management strike model becomes broken
Global competition on finished products grows
Competition/Collaboration Pendulum
Competition Collaboration
1990’s: Technology Flattens the World
New competitive pressures
Ability to buy globally
Competition/Collaboration Pendulum
Competition Collaboration
2000 to Today:
China continues to become more expensive
Natural disasters/political unrest have exposed risks in long global supply chains
Recession forces supplier cost restructuring
Unions continue to decline
Competition/Collaboration Pendulum
Resulting Trends in Purchasing
Suppliers annual cost reductions were challenged
Risk management continues to be actively pursued
Move to Upfront Awarding of Business
Increased Collaboration on cost reductions up front and after SOP
Manufacturer’s are now expecting their (Tier 1) suppliers to have cost standards/models with their suppliers to accelerate the continuous improvement process
Overall number of suppliers continue to be reduced
Engineering executives leading some purchasing organizations to further close the collaboration GAP
Mark L. Reuss is responsible for the design, engineering, program management and
quality of General Motors vehicles around the world. He also oversees GM’s Global
Purchasing and Supply Chain organization, and is a member of the GM Executive
Operations Committee, as well as a member of the Opel Supervisory Board and the board
of Shanghai General Motors (SGM).
Purchasing & Supply Chain and Design & Engineering report into the same person
Goal: Have stronger collaboration between the organizations.
General Motors Press Release - 2014
Lieblein said. "I don't want to be talking to CEO’s about terms and conditions. I
want to be talking to them about technology and quality and driving waste from
the system."
"We're not just saying, 'This is in your contract, you go figure out how to do it,'"
Lieblein told Automotive News last week. "Let's work together to understand the
cost drivers in your business."
Automotive News - 2014
Succeeding Tony Brown as group vice president,
Global Purchasing is Hau Thai-Tang, who will report
to Mark Fields, Ford’s chief operating officer. Thai-
Tang currently is vice president, Engineering. His
extensive global experience leading the company’s
global engineering operations in North America,
South America and Europe will enable him to bring
the same One Ford approach to Ford’s purchasing,
the company said.
Ford Press Release - 2013
Scott R. Garberding was appointed Fiat Chrysler Head of Group Purchasing and named a member of the Group Executive Council (GEC) in September 2013.
In December 2009 he was appointed Senior Vice President of Manufacturing/ World Class Manufacturing, Chrysler Group LLC. In this position, he was responsible for all assembly, stamping, and powertrain manufacturing operations worldwide as well as implementation of the World Class Manufacturing system at all Chrysler Group manufacturing facilities.
FCA Press Release - 2013
Time
Very
HighOpen
Cost
Piece
Price
Level of
Transparency
and Savings
Very
Low
Medium
Cost
Breakdowns
Cost
Estimates
Should-be
Cost
Cost Transparency Curve
21
Very
HighOpen
Cost
Piece
Price
Level of
Transparency
and Savings
Very
Low
Medium
Cost
Breakdowns
Cost
Estimates
Should-Cost
Time
Sourcing Evolution in Manufacturing
Time
Very
HighOpen
Cost
Piece
Price
Level of
Transparency
and Savings
Very
Low
Medium
Cost
Breakdowns
Cost
Estimates
Should-be
Cost
24
Pragmatic Application of Tools
Collaborative vs. Competitive
Time
Very
High
Open
Cost
Piece
Price
Level of
Transparency
and Savings
Very
Low
Medium
Cost
Breakdowns
Cost
Estimates
Should-be
Cost
Collaborative Curve
Competitive
Curve
25
Few suppliers
Stronger predictability within the supply chain
Less Market Tests, more focus on cost drivers & cost modeling
Low cost, healthy profit
Future Product awarded up front, supplier design collaboration, intense focus on cost drivers
Many Suppliers
Uncertainty
Constant Market Test for all costing needs = “uncertainty”
Low Price, Profitability is not clearly known with suppliers
Future Product sourced through market testing after design
Competitive Model Collaborative Model
Collaborative vs. Competitive
27
Positives
Straightforward supplier
participation
Swift results
Simple analysis
Usable for most commodities
Negatives
Limited understanding of cost
drivers
Struggle to understand pricing
validity
Inconsistent supplier pricing
Difficult to control price over
time
Positives
Detailed understanding of cost
drivers
Ability to validate quote
Establish methodology for
pricing adjustments
Standardize cost
Basis for collaborative
relationships and tools
Negatives
Involved Supplier Participation
Usable for select commodities
More time spent in preparing
and analysis
Piece Price Only Moving up the Curve
Management of Pricing
Time
Very
High
Open
Cost
Piece
Price
Level of
Transparency
and Savings
Very
Low
Medium
Cost
Breakdowns
Cost
Estimates
Should-be
Cost
Collaborative Curve
Competitive
Curve
Collaborative vs. Competitive
Open Book Cost Models
The Road to Strategic Relationships
In the past customers exerted more of their demands and considered less of the suppliers needs
But the need to get more out of the supply chain has changed the relationship to more collaborative.
Technology
Speed to market
Reduced warranty & recalls
Cost improvements
Collaborative Tool Jointly Developed
Designed to understand a supplier’s cost structure
Enhance transparency between customer and supplier
Determine/form long-term relationships
Identify risks and opportunities
Open Book Used to:
Facilitate transparent cost related discussions with suppliers (driven by data)
Identify and eliminate waste Become the baseline for any pricing related discussions
Open Book Cost Models
Open Book Is..
Supplier/Plant specific Models
Understanding true costs to manufacture a product
Activity based Costing –features and process are linked to cost
Collaborative
Open Book Is Not…
One and done…
Generic “one size fits all” modeling
Audit tool
Open Book Cost Models
Supplier
Costing
Controller
Manufacturing
Engineering
Purchasing
Customer
Buyer
Value Chain Engineer
Cost Engineer
Others as needed
Open Book Cost Models
• Capabilities
• Manufacturing Metrics (data collection)
• Production Equipment
• Review Capacity Utilization
• Sales
• Customers
• Review Costs
• Continuous Improvement
• Test the application of the model on initial RFQ
• Understand commodity impact
• Determine Rankings
• Strategic Supplier Identification
• Generate 1st
draft with supplier
• Make any required changes to the model working with the supplier
• Work thru 2nd, 3rd iterations
• Set the model –mutual agreement
Visit
Supplier
Process Data,
Generate Model
Identify Potential BIC
Suppliers
Business Alignment w/
Strategic Suppliers
• Customer to generate strategies to work together with Best In Class supplier
• Customer & Best in Class Supplier to model many parts
• Customer takes advantage of suppliers cost structure thru business alignment with Strategic Suppliers
• Visibility into the cost drivers
• Benchmark Cost Divers = Waste Identification
• Reduce Waste
• Understand Financial Impact of Waste Reduction
Continuous Cost
Improvement
APD Open Book Cost Model Process
Agreed to Utilization
(Currnet Utilization)Agreed to SG&A %
Machine Number /
Identifier
Machine Make
& Model
Machine
Size
(Tonnage)
Burden Rate
Per HourOEE
Avg Set-up
time
Agreed-66% SG&A-- 5% Punch Press Erfurt 100 Ton $8.68 90% 1/2 hour
Punch Press Stanko 100 Ton $8.68 90% 1/2 hour
Punch Press P & W 100 Ton $8.68 90% 1/2 hour
Punch Press P & W 100 Ton $8.68 90% 1/2 hour
Punch Press Minster 135 Ton $22.00 90% 3/4 hour
Punch Press Warco 200 Ton $18.31 90% 1/2 hour
Production Associate - Production
Department
sorting, rework, packaging product at the press or
offline(hand transfer)Punch Press Minster 250 Ton $30.58 90% 3/4 hour
Low tonnage Press Operatorperforms all setup, first off, of progressive, transfer
dies (100 - 250 ton)Punch Press Niagara 260 Ton $30.58 90% 3/4 hour
Hign Tonnage Press Operatorperforms all setup, first off, of progressive, transfer
dies (600 - 800 ton)Punch Press Warco 300 Ton $34.61 90% 3/4 hour
Production Associate - Weld
Department
assist in the set up and operation of resistence
robotic weldingPunch Press Bliss 400 ton $46.80 90% 3/4 hour
Rework Welder operates manual mig welding Punch Press Brown Boggs 400 ton $46.80 90% 3/4 hour
Final Assembly welder operates mig welding equipment - independantly Punch Press W & M 400 ton $46.80 90% 1/2 hour
Punch Press Brown Boggs 600 ton $64.86 90% 3/4 hour
Punch Press PTC 600 ton $64.86 90% 3/4 hour
Punch Press Blow 600 ton $64.86 90% 3/4 hour
Punch Press Schuler 600 ton $64.86 90% 3/4 hour
Punch Press PTC 800 ton $82.31 90% 3/4 hour
Punch Press PTC 800 ton $82.31 90% 3/4 hour
Punch Press PTC 800 ton $82.31 90% 3/4 hour
Robotic Weld Cell ABB 10' x 10' $19.67 90% 1/6 hour
Robotic Weld Cell ABB 10' x 10' $19.67 90% 1/6 hour
Robotic Weld Cell ABB 10' x 10' $19.67 90% 1/6 hour
Robotic Weld Cell ABB 10' x 10' $19.67 90% 1/6 hour
Robotic Weld Cell ABB 10' x 10' $19.67 90% 1/6 hour
Robotic Weld Cell ABB 10' x 10' $19.67 90% 1/6 hour
Robotic Weld Cell ABB 10' x 10' $19.67 90% 1/6 hour
Manual Mig Weld Cell Lincoln 10 ' 5' $5.80 90% 1/6 hour
Raw Materials Per Actual thru Invoice Review Manual Mig Weld Cell Lincoln 10 ' 5' $5.80 90% 1/6 hour
Manual Mig Weld Cell Lincoln 10 ' 5' $5.80 90% 1/6 hour
Manual Mig Weld Cell Lincoln 10 ' 5' $5.80 90% 1/6 hour
Manual Mig Weld Cell Lincoln 10 ' 5' $5.80 90% 1/6 hour
Manual Mig Weld Cell Lincoln 10 ' 5' $5.80 90% 1/6 hour
Projections Weld Cell Press Welder 8' x 5' $6.00 90% 1/6 hour
Projections Weld Cell Press Welder 8' x 5' $6.00 90% 1/6 hour
Projections Weld Cell Press Welder 8' x 5' $6.00 90% 1/6 hour
Projections Weld Cell Press Welder 8' x 5' $6.00 90% 1/6 hour
Job Classification Typical Job Responsibilities
Unit of Measure for costName of Operation
$15.76
$19.41
$20.95
3. Raw Materials & Outside Processes
Per Actual Thru Invoice Review
Currency of
Rates in Model
$18.17
$23.08
5. Equipment Burden Rates
2. Labor Rates
$15.97
Agreed Rate -
Fully Fringed
1. General Information
Rate per Unit of
Measure
Stampings Example
Current Business Model
A B
Market Pricing from Suppliers A & B
Assuming quality, delivery,
payment terms are equal,
Then traditionally supplier A
would be selected for the
business.
40
A B
Supplier A has a higher cost structure and thin margins
A better solution is to work with Supplier Bto improve costs and maintain a healthy margin
Co
sts
Co
sts
Profit
Co
sts
Profit
B’
Visibility into costs = better management
Cost Transparency
In this case the improvement is 14% vs. the standard quote
Healthy Profit = Healthy Supply Chain vs. just low price
Applied the Cost Model
Raw Materials
Direct Labor
Burden
SGA
Profit
Becoming More Competitive
What Companies Need to Do to Prepare
Make sure your internal costing system is tracking actual costs to the processes/work cells.
Understand if there are proprietary processes and their costs – customer/suppliers should be sensitive to these
Understand the walk from actual costs to historical customer quotes.
Plan the negotiation and define what you are willing to do:
Past pricing
Future Pricing
Getting Started
Choose the right commodity Stronger Spend Ability to realign the spend to low cost strategic suppliers
Supply Base Reduction or Realignment/Rationalization Leveraging new business awards
Moving to Fewer Strategic Suppliers
Choose the right suppliers Quality Capabilities Delivery Financially Healthy Potential to Grow the supplier More Progressive and Adaptive to an evolving relationship
Tie Strategic Supplier Status to Open Book Cost Modeling
Tie Early Sourcing to Open Book Cost Modeling
Tie supply base reduction/rationalization to Open Book Cost Modeling (resourcing to proven low cost producers)
Supplier has final approval to cost model
Ultimately we need to tie current and future business to open book cost modeling program
Engaging Suppliers for Open Book
Cooperative Process
Don’t go below the supplier’s costs
Supplier has direct input into the cost model
Supplier has final approval of the cost model
Must be based on actuals
Key is to be among the proven low cost producers
Engaging Suppliers for Open Book
Company Culture and Top Management
Support
Skill Set of Existing Personnel and/or
Willingness to Acquire Capability
Data Capture and Analysis
Capability
4 Points 3 Points 3 Points
Positive Environment
Executive-level support and cross-functional
collaboration prevalent. Initiatives typically view
suppliers as partners, and take a long-term focus.
Willing to move the business to new partner
suppliers, as business case dictates.
Buyers and/or cost engineers have thorough
understanding of cost breakdown details as it
relates to various manufacturing processes.
Buyers, in particular, are skilled at collaborative
negotiations. Company invests in training and
additional resources as needed.
Robust level of data capture on
both internal (make) and external
(supplier) cost breakdown details:
Material
Labor
Overhead Burden
SG&A
Profit
2-3 Points 2 Points 2 Points
Middle Ground
Top-level support, but limited understanding of the
role senior management plays in strategic cost
management. Some level of success to date with
“flavor of the month” cost reduction initiatives.
Support from cross-functional teams only as the
business needs dictate periodic financial
improvement. Limited desire to change suppliers.
Buyers have some training and cost
breakdown analysis capability. Generally
conduct competitive negotiations with
occasional ventures into collaborative
approaches. Willing to invest in additional
resources and skill sets where needed.
Internal (make) cost breakdown
details available. Limited external
(supplier) cost breakdown details
available.
0-1 Point 0-1 Point 0-1 Point
Negative Environment
Limited or no executive support. Limited or no
cross-functional willingness to collaborate with
purchasing and/or suppliers. Historical cost
reduction efforts largely unsuccessful.
Buyers have little or no training in cost
breakdown analysis. No cost engineers on
staff. Not willing to invest in needed skill sets
or consulting support, in the absence of
internal capability.
Limited internal (make) and no
external (supplier) cost breakdown
details available.
Scores
APD - WMUCost Transparency Readiness Rubric8-10 points: Ready to move toward culture of cost transparency and collaboration4-7 points: 1-2 enabling events needed for true cost transparency approaches to embed0-3 points: Not ready for cost transparency approaches
Cost Transparency Self Assessment