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Discussion Document . Driving the Next Generation Purchasing Model. Morristown, New Jersey October 12th, 2006. Executives are looking for the next generation sourcing model.

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slide1

Discussion Document

Driving the Next Generation Purchasing Model

Morristown, New Jersey

October 12th, 2006

executives are looking for the next generation sourcing model
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“
slide3
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”
toyota and honda s model is advantaged across multiple dimensions
Toyota and Honda’s model is advantaged across multiple dimensions
  • 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
slide5
Two different philosophies have been used to manage suppliers – price based and cost / performance based sourcing

Supply Base Philosophies

Price Based

Cost/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
  • 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

HONDA

the new purchasing operating model is based on three key pillars
The new purchasing operating model is based on three key pillars

New Purchasing Operating Model

  • 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

Commitment to People Development

Commitment to understanding ideal performance and eliminate waste

Commitment to Suppliers & Expectations from Suppliers

  • 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
  • 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
  • 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
slide7
The ideal performance based model creates the “right” supplier behaviors and a continuous learning cycle from product to product

Aligned Behaviors

A Learning Cycle From Program to Program

  • 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

SupplierQuote

IdealPerformance

Agreed-to Cost Model

Update Cost Standards

Supplier Improvement Program

slide8

System

SG&A / Markups

Base Tooling

Tooling Mods

Assembly

Injection Molding Processes

Comp Processes

Comp 2 Processes

Structure Assembly

Additional Processes

Components

Structure Processes

Injection Molding Materials

Components

Comp Materials

Comp 2 Materials

Structure Materials

Cost standards are integral to the approach and are a powerful way of managing supplier target costs, year on year improvements and engineering changes

EXAMPLE COST ARCHITECTURE

Cost 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.

Total Purchased Part Cost

Markup and Tooling Costs

Conversion Costs

Input Costs

cost standards are built up from the physical reality of what is possible
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

Part Information

Material Costs

Labor Costs

Capital Costs

Overhead Costs

Profits

slide10
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

slide11

Knowledge is captured on an on-going basis across the global organization to provide deep insight into material costs and conversion costs ...

Example: Material Cost Targets

Example: Process Cost Targets

Example: Material Yield Ratio Targets

as well as applicable sg a base tooling tooling modifications and acceptable mark ups
… as well as applicable SG&A, base tooling, tooling modifications and acceptable mark-ups

Tooling Modification Cost Targets – Injection Molding

Mark Ups - Seat

Transfer Die Cost Targets – Base Tooling

slide13

EXAMPLE

The same cost table approach is used to manage engineering changes and to avoid cost walk-ups by the supplier

PRODUCT COST EVOLUTION

Actual material costs

Status

at SOP

$ / Car

7 %

Revised

Target

13 %

Target costs

Original

Target

SOP

Time

slide14
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
slide15
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
slide16
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

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

T-1 Performance

Year T Target

Target

Result

Goal

Stretch

YYYParts

QUALITY

Defects/Million

30

158

50

<30

Critical Field Problems

0

0

0

0

DELIVERY

On Time Performance

100%

100%

100%

100%

Supplier Annual Plan

Mixed Kanbans

0

0

0

0

COST

Material

2%

2%

4%

4%

Program Based

Manufacturing Improvement

4%

4%

3%

4%

XXX

Parts

QUALITY

N/A

N/A

N/A

N/A

N/A

DELIVERY

Performance Ratio

100%

100%

100%

100%

PrototypeParts

QUALITY

PPIR

N/A

N/A

N/A

N/A

DELIVERY

Performance Ratio

N/A

N/A

N/A

N/A

Develop Product

CYCLE TIME

Months

20

22

20

18

individual supplier expectations for the year include corporate plant and part level targets
Individual supplier expectations for the year include corporate-, plant- and part- level targets

Examples of Supplier Targets at Corporate, Plant, and Part Level

Client Name

INDIVIDUAL SUPPLIER EXPECTATIONSParts & Components

ILLUSTRATIVE

Corporate-Level TargetsSupplier NameSupplier Code: XXXX

Plant-Level TargetsSupplier NameSupplier Code: XXXX

Part-Level TargetsSupplier NameSupplier Code: XXXX

2004 Customer Value Improvement Target

PlantCode

Commodity

Quality

Delivery

Part Number

Project

Target (Piece Price + Tooling)

Text Box for Value Improvement Target (VE/VA)

OE Target

Service Target

Prototype Target

XXXXX

XXXX

$XX.XX

XXXXX

XXXX

$XX.XX

XXX-X

XYZ

XX

XX

O PPIR

100% On-time Delivery/Zero Mixed Kanbans

Tier II Minority Sourcing Target

XXXXX

XXXX

$XX.XX

XXXXX

XXXX

$XX.XX

5%(Measurement of Total Purchases for Customer)

XXXXX

XXXX

$XX.XX

XXX-X

XYZ

XX

XX

O PPIR

100% On-time Delivery/Zero Mixed Kanbans

XXXXX

XXXX

$XX.XX

2004 Customer Warranty Target

XXXXX

XXXX

$XX.XX

XXXXX

XXXX

$XX.XX

X PPM

XXX-X

XYZ

XX

XX

O PPIR

100% On-time Delivery/Zero Mixed Kanbans

XXXXX

XXXX

$XX.XX

XXXXX

XXXX

$XX.XX

XXXXX

XXXX

$XX.XX

Supplier Environmental Program Requirements

XXX-X

XYZ

XX

XX

O PPIR

100% On-time Delivery/Zero Mixed Kanbans

XXXXX

XXXX

$XX.XX

ISO 14001 Certification by 12/31/05

XXXXX

XXXX

$XX.XX

XXXXX

XXXX

$XX.XX

XXX-X

XYZ

XX

XX

O PPIR

100% On-time Delivery/Zero Mixed Kanbans

XXXXX

XXXX

$XX.XX

Individual Expected Tasks (IETs)

XXXXX

XXXX

$XX.XX

XXXXX

XXXX

$XX.XX

XXX-X

XYZ

XX

XX

O PPIR

100% On-time Delivery/Zero Mixed Kanbans

XXXXX

XXXX

$XX.XX

XXXXX

XXXX

$XX.XX

XXXXX

XXXX

$XX.XX

XXX-X

XYZ

XX

XX

O PPIR

100% On-time Delivery/Zero Mixed Kanbans

XXXXX

XXXX

$XX.XX

XXXXX

XXXX

$XX.XX

slide18
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

Drivers of “Churn” by Development Stage

Tooling

($MM)

Illustrative

Design Verification & Prototype Testing

+ 30%

Concept Development

Detailed Design

  • 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

Piece Part Cost ($)

+ 20%

for each category the ideal supply chain structure will also be defined
For each category, the ideal supply chain structure will also be defined

Right Plant

Right Network

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
  • 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
slide20

The first step is to evaluate how the supplier’s present manufacturing footprint affects their competitive position and assess the gap to ideal

EXAMPLE

Scale

(Avg. Capacity by Plant)

Factor Costs

(Avg. Labor Costs w/ 100% = Germany)

Too few low cost sites

Too many sites

Flexibility

(Weighted Plant Avg. of Models per Line)

Complexity

(Weighted Plant Avg. Produced Units / Model)

No clear focus of sites

No flex-technology for optimized utilization

slide21
You thenbuild an ideal supply network footprint by segment – and understand how the suppliers fit with this

Precision Molding

EXAMPLE

Rationale

  • Total spend: 123M
  • Ideal plant scale: $70M
  • Our share: 50%
  • Each plant is $35M spend

1.0

0.0

5.9

0.3

6.0

15.0

Ideal Supply Network for Precision

10.2

  • Number of Plants:3 - 4
  • Footprint:
    • MI (2 plants)
    • IN (1 plant)
    • Mexico (potentially 1 plant if justified by increasing volume)

4.3

1.0

0.0

2.2

0.0

0.5

0.1

0.0

this approach achieves significant performance improvements
This approach achieves significant performance improvements

Sources of Injection Molding Savings Compared to Current Supply Base

Mold change technology, IL skills and simple flows are key enablers

Engineering capability at supplier

4-9%

19%

10%

30-50 presses

Short Term

Medium Term

slide23

Supplier Metrics/ Targets

(Need to be confirmed with Suppliers)

R&D applicable to Customer (% of revenue) 2005 Targets

3%

Development - % on time: 100%

Sourcing – Ave Material cost reduction (2003 vs. 2002): 5-10%

Boeing Rates Suppliers

Supplier

Maturity

Maturity

Attributes

Attributes

Ratings

Ratings

R&D:

:

Manufacturing

Supplier Inventory Turns: 6-10

Average supplier lead time: 3 Months

Annual Lead time improvement: 15%

Annual Value Added Productivity Improvement:3-5%

Shares IRAD project lists with

Shares IRAD project lists with

1

1

2

2

3

3

4

4

Prime for rating

Engages in joint technology

Engages in joint technology

1

1

2

2

3

3

4

4

review sessions

review sessions

Reports IRAD funding that is

Reports IRAD funding that is

1

1

2

2

3

3

4

4

applicable to Boeing programs

applicable to Boeing programs

Resets IRAD priorities based on

Resets IRAD priorities based on

1

1

2

2

3

3

4

4

joint technology sessions

joint technology sessions

Bid and Proposal

Bid and Proposal

Identifies opportunities to

Identifies opportunities to

1

1

2

2

3

3

4

4

leverage and support joint

leverage and support joint

marketing

marketing

Routinely responds to support

Routinely responds to support

1

1

2

2

3

3

4

4

customer

customer

s timing requirements

s timing requirements

Service - Average Repair turn-around (lead) time: 30 Days

Supports common T&Cs

Supports common T&Cs

1

1

2

2

3

3

4

4

Supplier and customer improvement opportunities are combined to establish a joint agenda to deliver results

Joint Improvement Roadmap

Improvement Levers & Diagnostics

Process Effectiveness

14

1

2

5

15

10

Joint Sourcing Leverage

Technology

Concept Definition

Engineering Competency Assessment

Advantaged Network

Service Parts

6

11

16

Early Supplier Involvement

Global Footprint

Dealer Delivery

3

7

Performance Metrics

Early Stage Effectiveness and Efficiency

Design-Driven Cost Reduction and Reduction of Functional Test Requirements

Opportunity Area

12

4

8

Design Trades

Engineering Capability Maturity

Benchmarks

Part Ordering and Delivery

9

13

Engineering Integration

Transaction Efficiency

Joint Improvement Roadmap

slide24
Involving suppliers early in development is key to leverage the total cost structure and suppliers’ innovation capabilities

Product Cost structure

Potential Activities

  • Purchasing alone
  • Commercial negotiations can only attack the tip of the iceberg

Margin

0%-5%

40%

  • Purchasing supported by Engineering
    • Improved cost of product
    • Improved functionality

Purchased

Cost

Design of

the product

Supplier integrated with a cost and revenue perspective

  • Bring new technology
  • Accelerate product to market
  • Share customer understanding

20%

Manufacturing

Engineering

5%

30%-35%

Overhead

Others

Typical Cost

Breakdown

slide25
Involving suppliers in innovation will allow the organization to access a larger pool of opportunities in achieving target product costs

Breakdown of Savings by Source

(Client experience)

Price

Negotiation

16%

Design

Re-Sourcing

45%

17%

22%

Technology

Improvements/

Advancements

slide26

COST TARGET

Toyota’s commitment to understanding product costs at a process level started as a way to support early product development cost/value trade-offs

Cost Engineering

Cost Engineering

  • Engineering owns cost target and drives achievement together with Purchasing
  • Functional requirements instead of over-engineering
  • Cost management (Value analysis, trade-off management etc.)

VEHICLE

PROFIT

Development Process

Value: High in market

Cost: Minimize

  • No over-specifications
  • No cost increase after contract signing
  • Product cost target achieved at launch

Product Definition

Technical Concept

Business Case

Development

Launch

Go

Ahead

Decision

Brand, Design, Marketing

Engineering

Finance, Purchasing,

Chief engineer

Engineering

  • Benchmarking of requirements, options & features
  • Cost reduction ideas & implementation support
  • Concept competition during sourcing process from preferred suppliers

Supplier Involvement

we see a number of levers that take the supplier early involvement process to the next level
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
slide28

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

SUPPLIER

EXAMPLE

R&D Project Name

Tech Maturity

Composite Ranking

A1 View

A2 View

A3 View

A4 View

A1 Overlap

A2 Overlap

A3 Overlap

A4 Overlap

Technology Focus Area 1

Project 1

9

High

Medium

Medium

Medium

High

Medium

Medium

Project 2

9

High

Medium

Medium

Medium

High

High

Medium

Medium

Project 3

Low

9

High

Medium

Medium

Medium

High

High

Medium

Medium

Project 4

Medium

7

No Rating

Medium

High

Medium

Medium

Project 5

7

High

Medium

No Rating

Medium

High

High

Medium

Medium

Project 6

High

5

No Rating

Medium

Medium

Low

High

Project 7

High

4

No Rating

Medium

No Rating

Medium

Medium

Project 8

High

4

No Rating

Medium

No Rating

Medium

High

Medium

Project 9

High

3

No Rating

Low

No Rating

Medium

Medium

Project 10

2

No Rating

Low

No Rating

Low

Project 11

Low

2

No Rating

Low

No Rating

Low

Project 12

2

No Rating

Low

No Rating

Low

Project 13

High

2

No Rating

Low

No Rating

Low

slide29

Suppliers Respond to RFI

OEM Evaluates Responses

OEM Drafts RFP

Contract Award

RFP

Single RFP

Surfacing alternative design concepts from suppliers is a major lever– funding the design activity separately from production can have merit

Development Phase

ALTERNATE ESI / RFP PROCESSES

Typical

Component Spec

RFI

BTP

Architecture

Component Spec

Contract Award

Round table

Pick Key Suppliers

Type 1

RFI

BTP

Round table

Functional Requirements

Component Spec

Down-select

Custom

RFP

BTP

Type 2

Supplier Bid List Developed

Contract Award

RFI

Custom

RFP

BTP

Success

New Contract Award

Type 3

Review

Identify System to be Redesigned

Component Spec

Select Second Source

Failure

intelligent architecture is the process of working with suppliers to leverage cross customer scale
“Intelligent architecture” is the process of working with suppliers to leverage cross-customer scale

Cross-OEM Cost Savings Potential:

Component XX2004

Re-Use Within And Across Customers

Cost with a cross-VM approach

VM #3

Seat B.O.M.

Small Car

Large Car

Frame

Mechanism

Trim

Foam

Part #15

Part #16

Part #18

Part #20

Part #2.v2

Part #17

Part #19

Part #21

VM #2

Seat B.O.M.

Small Car

Large Car

Frame

Mechanism

Trim

Foam

Part #8

Part #9

Part #11

Part #13

Part #2

Part #10

Part #12

Part #14

Unit Cost

VM #1

Seat B.O.M.

Small Car

Large Car

Frame

Mechanism

Trim

Foam

Part #1

Part #3

Part #5

Part #7

Part #2

Part #4

Part #6

Part #7

Suppliers can leverage both within AND across VMs

5

1

730,000

4

1

600,000

1

1

375,000

1

1

300,000

11

1

2,015,000

Programs

Component

Volume

example
Example …

Design Re-Use Example Clusters

slide32
People development and hiring is a major part of the transformation to the new sourcing model since the required skills are different

Critical Skills in the New Purchasing Model

  • 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
slide33
Aligning metrics – both within the Purchasing organization and how Purchasing is measured – requires a true paradigm shift

Common / Traditional Purchasing Metrics

Roadblocks and Challenges

  • 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)
  • 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

New 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
slide34
Measuring yourself and the supply base against this ideal performance is a key element of this shift in philosophy

Cost / Price Reduction Needs To Be Based On Reality Changes

CLIENT EXAMPLE

Part XXX

Price

Traditional Metrics:

Price-to-Price Savings

Quoted Price

$2.69

5%

$2.55

5%

$2.43

5%

$2.35 Targeted

$2.30

Improvement

Agreed Cost with Supplier Improvement Plan

Cost Modeled

  • 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

$2.17

New Metrics:

Performance Vs. Ideal

Ideal

$1.49

Ideal Cost Target

1

2

3

Time(in years)

this new model requires a fundamental shift in mind set
This new model requires a fundamental shift in mind set

TODAY

TOMORROW

  • 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
  • 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
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