Library
Supplier Partnerships
from The Lean Toolbox, by John Bicheno. Available from PICSIE in Britain.
The concept of supplier partners developed strongly in the 1980s as a result of the movement towards just-in-time (JIT) manufacturing. JIT emphasises reduction in waste, shortening of lead times, improvement in quality, continuous improvement, and simplicity. These are also the goals of supplier partnership. Today supplier partnerships are found both in service and manufacturing.
The philosophy is that, through cooperation rather than confrontation, both parties benefit. It is a longer term view, emphasising total cost rather than product price. Cost includes not only today’s price of the part or product, but also its quality (defect / ppm rate), delivery reliability, the simplicity with which the transaction is processed, and the future potential for price reductions.
But partnership goes further: Long term, stable relationships are sought rather than short term, adversarial, quick advantage. The analogy of a marriage is often used. It may have its ups and downs, but commitment remains. In a partnership, contracts will be longer term to give the supplier confidence and the motivation to invest and improve. Both parties recognise that the game whereby low prices are bid and then argued up on contingencies once the contract is awarded, is wasteful and counter-productive. Instead, it may be possible for both parties to cooperate on price reduction, sharing the benefits between them. Such cooperation may be achieved through the temporary secondment of staff. (See the section on Supplier Associations).
For partnership to work, there must of necessity be few or single suppliers per part. There is not necessarily a risk of “being taken for a ride’ because there is too much to loose. But there are ways around this too: having one supplier exclusively supplying a part to one plant, but another supplier exclusively supplying the same part to another plant. This spreads the risk whilst still achieving single supplier advantages. Alternatively there is the Japanese practice of cultivating several suppliers simultaneously but then awarding an exclusive contract to one supplier for a part for the life of the product, and selecting another supplier for a similar part going into another end product. The idea is to work with a few good, trusted suppliers who supply a wide range of parts. Partnership has therefore resulted in drastic reductions in many a company’s supplier base. An objective is to remove the long tail of the supplier Pareto curve whereby perhaps 10% of parts are supplied by 80% of the suppliers. See the figure below.
In common with Lean Thinking, partnership aims at waste reduction. Purchasing and Supply muda include multiple quotes, order acknowledgement, remittance advices, invoices, counting, repackaging, checking, returns, expediting, double handling, and of course storage.
Usually, partnership begins with a Pareto-type analysis of suppliers by cost and number of parts. Then, exploration as to how to reduce or combine sourcing begins. Supplier days are held, often annually, when company plans and objectives are explained, measures given, prizes for best performance given out, and factory tours held. For true partnership, director level meetings are held periodically, with much more frequent manager and engineer contact.
On quality, the partnership aims at zero receiving inspection and at delivery directly to the point of use. (By the way, partnership quality should talk in terms of ppm levels, not percentages.) Packaging and part orientation may be specifically designed to reduce waste. Delivery would often be subject to kanban call-off: the partner would be warned of gross requirements far out, more detailed requirements close in, but the actual sequence and timing of delivery is controlled by kanban. Many attempt this, far fewer achieve it. Both sides need to work towards schedule stability: the customer to not change his mind at the last moment, and the supplier to provide reliable delivery. (Unstable schedules ultimately cost the customer in terms of money and risk, and reduce the possibility of productivity gain at the supplier.) Sometimes, the supplier is responsible for maintaining inventory levels at a customer, called VMI (vendor managed inventory) which is increasingly found for consumables. Other times, a manufacturer may write the production schedule of the supplier. As trust builds, self billing or reconciliation becomes possible (“we built 100 cars, so here is our cheque for the 500 tyres we must have used”).
Improved communication links via EDI or EPOS further enhance partnership advantages. Delivery cooperation becomes possible either through “milk rounds” (whereby small quantities are collected from several firms in an area every day, rather than from one firm once per week), or, where more work is given to one supplier, mixed loads are sent every day rather than one-product loads once per week. This improves flow and reduces inventories.
Cooperation on design is part of partnership. The manufacturer recognises the supplier’s ability to design the parts that it-makes, rather than simply specifying. This policy of “open specs” or “black box” specs can lead to faster, lower cost, and more up to date part supply. The partnership idea encourages the concept of a company sticking to its core business, whilst putting out non-core business.
Generally, supplier partnership makes sense for “A” and possibly “H” parts; less so for commodity items. Part criticality and risk also influence the partnership decision; you would not risk partnership with a company having poor industrial relations, or weak finances, or poor quality assurance. This means that a team approach is necessary in supplier selection. The Purchasing Officer may coordinate, but throughout the partnership Design would talk to their opposite number in Design, Quality to Quality, Production control to Production control, and so on.
Disadvantages ? Time, commitment, costs of establishment, risk of inappropriate choices of partner, and short term cost reduction opportunities foregone against medium term gains.
Value engineering (see separate section) is a technique that both parties may adopt for mutual advantage. VE/VA is a powerful technique for cost, quality and delivery. In advanced partnerships a “satellite plant” dedicated to a particular customer and located nearby, or “suppliers in residence” where the supplier’s operation and or some of its staff are permanently located on the customer’s site, may be worth consideration. Volkswagen’s Brazilian plants are reported to use supplier’s employees on the VW assembly line - is this the future of partnership, or a quest for flexibility?
In Japan, and increasingly in the rest of the world, supplier partnership is now expanding down from relationships with first tier suppliers, to second and even third tier. Larger firms in the car industry have been leaders, but other industries and smaller firms are following. The thought, in common with TQM, is that quality is only as good as the weakest link.
Further reading
James Womack, Daniel Jones, Daniel Roos, The Machine that Changed the World, Rawson Associates, New York, 1990, Chapter 6, ISBN 0-89256-350-8
Richard Schonberger and Edward Knod, Operations Management, Irwin, Illinois, 1994, Chapter 8.
Hines, Peter (1994) Creating World Class Suppliers: Unlocking mutual competitive advantage, Pitman, London, ISBN 0-273-60300-0
Lamming, Richard (1993) Beyond Partnership, Prentice Hall, Hemel Hempstead, ISBN 0-13-43785-2