The Informed Outlook

Volume 7 · Issue 3 · March 2002

Move Supplier Development from Conformance to Lean Strategy
Collaborate to Compete by Building a Lean Supply Chain
By Norma Simons and Michele Economou

Mention "supplier development" to top management and quality professionals in most organizations today and you will get a very different answer than you would have in 1994, when the second edition of ISO 9001 and the first edition of QS-9000 were published.

The answer you will often get today relates to both changes in the quality management system (QMS) requirements contained in the latest editions of ISO 9001 and ISO Technical Specification (TS) 16949 (and the IASG Sanctioned QS-9000 Interpretations) and changes in the way organizations need to think and work to remain competitive.

ISO 9001:2000 contains two subclauses–7.4.1, Purchasing Process, and 7.4.2, Purchasing Information–that do make an organization responsible for ensuring that its suppliers are capable of meeting the organization’s (and its customer’s) specifications, but they do not require the organization to develop its suppliers so products and services purchased from those suppliers are improving. ISO 9001:2000 also requires the organization to continually improve the effectiveness of its QMS, so any competitive company should include supplier efficiency and effectiveness as improvement goals.

ISO/TS 16949:2002, which was published by ISO on March 1, goes farther than ISO 9001:2000 and specifically requires your organization to pursue supplier development, which means ensuring any supplier that affects your product has an effective QMS and is improving its processes to meet your customers’ needs.

While supplier development as required by these documents will improve the operations of your suppliers and will thereby improve your product and its ability to satisfy the customer, what does supplier QMS development really mean and how is your organization going to achieve it?

The fact is survival in today’s economic climate requires companies to develop a strategy to aggressively manage cost and increase value to the customer. The fundamental concepts of lean manufacturing that were created in the 1950s have emerged as an important method of achieving this objective in the first years of the 21st century, when ISO 9001:2000 is on the minds of top management and quality professionals in many industries.

The central tenet of the lean enterprise is to reduce waste and simultaneously increase value to the customer. Since production of a high percentage of the value-added components in many manufacturing–and nonmanufacturing –organizations are outsourced, it is not enough to be the most efficient firm, but the most efficient network.

Lean thinking and its implementation, however, need not be applied only within an organization for its processes to become less "top heavy", but throughout its supply base. To use a well-know cliché, competition has moved away from "company vs. company" to "supply chain vs. supply chain".

This means that an effective lean strategy must obviously incorporate and include the supply base. It is thus information sharing and collaboration that are the keys to driving value throughout the supply chain. In other words, ensuring that your suppliers have effective QMSs is important, but true supplier development goes beyond such baseline conformance with the requirements in ISO 9001:2000 or TS 16949:2002. You have to look at the whole business model in today’s terms and then pursue supplier development to fit the new world.

Present Situation: Competition Breaks Old Business Models

Market dominance and price leadership in most sectors have been broken–no single company dominates its sector nor determines price, whether you are talking about aerospace and automotive or packaged consumer goods and telecommunications.

This is the result of the shrinking global village, the introduction of innovative technologies that allow more organizations to compete in a market segment and the enhanced ability of many organizations to maintain consistent and quality-oriented processes that output product that meets customer needs as well as the market leader.

Take the automotive industry as an example. The competitive arena in the US automotive market has changed from a focus on the Big Three (DaimlerChrysler, Ford and General Motors) to a focus on the Big Five (Big Three plus Honda and Toyota), with several other original equipment manufacturers (OEMs) also being competitive. There are now more major players and no one player–nor even one grouping–dominates the market.

When it comes to price, the old model has also been broken. Formerly, when there were material price increases, the increased cost was passed up to the customer. Today’s competitive climate often leads to costs being passed down the supply chain instead, especially since there is pressure on the OEMs to remain competitive in a crowded field.

Likewise, the introduction of technology and methodologies that can lead to increased productivity have prevented labor costs from impacting on product costs, making price differentiation within market segments less likely. But this requires the entire chain to continually adapt and respond to ongoing changes in cost.

The Internet and other electronic forms of communication have enabled the customer to access more information about types of products and choices that are available. Power has shifted to the customer, who defines what is valuable by what is purchased. This continually forces companies to be more concerned about and sensitive to the needs of the customer.

As the competitive environment becomes more intense, companies are also noticing that profit margins are in decline. There is little blind commitment by customers to a particular product or service–a product or service must remain the most value-added choice available or it will be passed over for "the best deal". Companies need to be vigilant about cost reduction and value to sustain a viable position in any industry.

Improving Supply Chain Performance Is Critical to Success

Beyond the breaking of old business models and with it how customers and suppliers work together, the arrival of lean thinking and other process and productivity techniques means that limited runs have replaced large batch runs in most cases. With limited runs, supply chains must be better at what they do.

However, lean does not amount to much performance improvement by an organization when its suppliers are or become a constraint as the rest of the supply chain improves. The application of lean and/or other continual improvement initiatives must be common across the supply chain if limited runs and other lean processes are to lead to competitiveness and profitability in any sector.

But how do you pursue a lean strategy and get your organization and suppliers to "think lean"? The first step is to employ a "cost out" versus a "price down" strategy. The relentless pressures for cost reduction have forced companies to find innovative ways to offer high-performance products at a low cost. This is prompting organizations to assess the role of their suppliers and the supply chain as a source of increased profitability and cost reduction.

However, as cost pressures are passed down the supply chain, cost reduction and the overall enhancement of value cannot be viewed as an isolated initiative. Price reduction is only a tactical short-term solution, and organizations need to understand that there is a limit to how much a supplier can reduce its price and still remain viable.

Instead of focusing on a "price down" strategy, organizations need to employ a "cost out" strategy. This requires a holistic view of the supply chain whereby an organization works with its supply base to achieve the removal of waste through joint initiatives aimed at value creation.

What is meant by value creation? Value is defined as performance divided by cost, meaning that the output of your processes is an improved product or service that does more or performs better in meeting customer needs at the same or lower cost compared with previous processes. But value can only be created in the supply chain if there is a focus on systems integration, which requires that several companies organize and operate as one seamless entity.

Thus, to achieve value creation that will actually deliver value to the customer requires:

• The alignment of the entire organization–not just your organization, but also those suppliers that are involved in product realization to meet customer specifications
• An acknowledgment that value has to be delivered to the customer in a way that will ensure profitability and increase shareholder value
• An understanding of the relationship between the product’s price and its performance
• The ability to deliver value to the customer by achieving the total integration of the knowledge and skills of everyone in the supply chain
• The information technology infrastructure to support the supply chain processes.

More collaboration is required by your organization up to the customer, down to your suppliers and across the supply chain (yes, you need to work with the competition when you share suppliers and together you can improve processes and supplier sharing arrangements to reduce cost and create value within the supply base without affecting competition). Improvements in communication, information sharing and relationships based on trust equate to the hallmark of a new era in competing as a supply chain.

There are many stories of companies that mandated performance improvements and cost reductions from their suppliers without collaborating, and the result was a lack of value creation. Likewise, the success stories involve companies that have discussed with their suppliers how value creation is to be achieved, that have passed down ideas, data and techniques to assist these suppliers and that have shared responsibilities, development processes and best practices that improved both company and supplier performance.

Quality, Cost and Delivery have long been considered key indicators of supply base performance. Another key indicator has emerged in today’s environment–Connectedness. This is a measure of how well an organization is connected to and integrated with its supply chain. In the future, Connectedness will become another measure of how well the entire chain is organized and run and it will turn supplier development into supply chain development that will in turn improve the performance of the organization itself.

Components of a Lean Supply Chain

Having explored the current market situation and the changes required to make the transition to a lean supply chain so as to help you understand what customers are demanding and how you need to respond, we would like to examine some of the lean supply chain components your organization will need to consider in making the transition.

Remember, you are transitioning not just from an ISO 9001/2:1994-based quality system to an ISO 9001:2000-based QMS, but from an approach where the customer makes demands of its suppliers to one where the customer works with its suppliers to create a single, lean system. There may be many components to achieving a lean system, but two in particular will be critical to every organization’s efforts.

1. Supplier/Buyer Relationships

The traditional relationship between a buyer and its suppliers needs to be transformed into one that helps build closer ties and fosters continued collaboration between both parties to the relationship. The philosophy your organization applies has to lead to "win-win" results for buyer and suppliers. Any other approach, such as the traditional scenario where negotiations are one-sided, will result in a suboptimal situation and impact the overall effectiveness– the leanness–of the value chain.

A collaborative relationship means a readiness on both sides to discuss future plans, a willingness to understand each other’s business processes, a commitment to share in each other’s long-term strategies and an agreement to share in cost savings realized by any joint activities. What this comes down to is a culture change where top management and anyone else in your organization who interact with suppliers begin to treat them as partners rather than servants. It means communication and cooperation that is two-way from product design to delivery at the end-user.

When it comes to ISO 9001:2000 and any sector-specific requirements based on it, the requirements give little direction on what the organization-supplier relationship is supposed to contain or how to make the supply chain lean.

The closest specifications in ISO 9001:2000 are Subclauses 5.5.3, Internal Communication, and 7.2.3, Customer Communication, which provide requirements that offer limited insight regarding how communication is to take place between a customer and its supplier. It may be useful for an organization to consider its suppliers as part of its internal operations when developing processes to conform with Subclause 5.5.3, but what that will involve is unclear.

A better source for guidance on establishing a partnership between the buyer and its suppliers in QMS terms is ISO 9004:2000, Quality Management Systems–Guidelines for Performance Improvements. It contains guidance on processes that an organization should consider in terms of improving supplier relationships and thereby supplier quality. For example, Clause 6.6, Resource Management–Suppliers and Partnerships, states:

Clause 6.6. goes on to list opportunities organizations can take advantage of to create value with their suppliers and partners.

The ultimate goal is for your organization to launch initiatives to improve communication and interaction throughout the supply chain. Developing and implementing a wide range of such initiatives must be aimed at improving the responsiveness of the supply chain. These initiatives may include:

• Eliminating waste and non-value-added processes and even operations throughout the entire supply chain
• Identifying and simplifying key supply chain processes to improve efficiency and overall effectiveness
• Rationalizing the entire supply base
• Reducing throughput and lead times and overcoming the functional silos that divide and separate companies and foster inefficiencies.

2. E-Business

A critical component of creating a lean supplier network is the implementation of an e-business strategy. Technology should be used to enhance communication and move your organization and its entire supplier network toward paperless transactions. This will invariably improve efficiency in data transformation and information flow without unnecessary costs. Electronic commerce also has the ability to increase access to a larger number of global suppliers that may be strategically aligned with your organization. Collaboration is critical for Just-in-Time (JIT) production of the right amount of product exactly when it is needed and which can serve as a mechanism to avoid lead time issues.

Collaborative supply chain solutions function as a broker between customer and supplier by communicating supply-and-demand needs and issues across the supply chain via visual signals. Collaborative commerce–c-commerce–allows cyber communities to share intellectual capital, integrate diverse business processes and increase corporate innovation, market reach, productivity and profitability. Today’s technology promotes a large volume of relationships, which traditional enterprise resource planning systems do not. The technology must provide a means for understanding the entire supply chain, encompassing what the roles, policies and processes that define its personality are and how business transactions are handled.

It’s About Quality and the Bottom-Line

Unfortunately, most organizations with a registered QMS are likely to have developed their documentation and processes without understanding the entire value stream. Both ISO 9001:2000 and ISO/TS 16949:2002 have a stronger process focus, which means organizations need to concentrate more on value-added activities. Quality concepts must be taken beyond ISO 9001 or TS 16949 conformance and be integrated with lean principles, while performance measures must be based on waste removal and continual improvement initiatives. A lean enterprise is highly dependent on having stable, predictable processes with very few nonconforming products.

Many companies still do not have a means of tracking the quality performance of their strategic suppliers (e.g., trends in defective parts per million [PPM]). Quality has to move beyond conformance and provide value to the customer. According to JD Powers, the bottom-line fact is that the perceptions of quality and reliability of more "informed" consumers are used as "tie breakers" when they are purchasing new vehicles–and collaboration can help US OEMs to compete against and gain back market share from other OEMs.

In summary, your organization can begin creating a lean supply chain with its suppliers by doing the following:

• Redefine organization/supplier relationships
• Develop and implement an effective e-business strategy that will enhance communication across the supply chain
• Use appropriate performance measures that will provide feedback on the supply chain
• Increase collaboration across the organization/supplier interface
• Employ a "cost out" strategy
• Align your entire organization with its suppliers so that they form a single value-generating entity
• Improve process stability and process capability.

Creating and developing a lean supply chain requires the ultimate focus on the bottom-line through total systems integration and a commitment to provide value to the customer. A strategy of collaboration and systems integration is the only way that companies and their associated supply chain networks will be able to increase their profit margins–and that applies to both the companies and their suppliers.

We had the opportunity to attend a "Developing a Lean Supply Chain" conference on February 20, 2002, at the Automotive Hall of Fame in Dearborn, MI, and many of the ideas presented above are a result of attending sessions at that conference and having the chance to discuss these ideas with the guest speakers. These speakers included Mike Flynn from the University of Michigan, OSAT; Carol Ptak, President and CEO of APICS and co-author with Eliyahu M. Goldratt of Necessary But Not Sufficient; and Gary Flum, Director of Customer Value at QAD, a sponsor of the conference that develops software to assist the automotive and other industries with the conducting of business via Internet connectivity and c-commerce.

Norma Simons is President of Simons-White & Associates, Inc., a consulting and training organization that specializes in providing customized business and quality management solutions. She is presently working on a Reliability Committee for the American Society for Quality (ASQ) and is an ASQ-Certified Quality Engineer, Reliability Engineer and Six Sigma Black Belt. Ms. Simons has a MS in Industrial Engineering/Operations Research from Wayne State University in Detroit and can be contacted by e-mail (norma.simons@simons-white.com).

Michele Economou is Director of Sales & Marketing at Simons-White & Associates, Inc. She has been heavily involved in the quality field for the past six years, during which time she has served as the Quality Program Manager of the Automotive Industry Action Group (AIAG). Ms. Economou is a voting member of the ASQ Automotive Division Council, recently completed two terms as Editor-in-Chief of the Division’s Automotive Excellence magazine and is a member of THE OUTLOOK’s Editorial Advisory Board. She has a BS from Central Michigan University and an MPA from Oakland University and can be contacted by e-mail at michele@simons-white.com.

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