W Professor Jeff Dyer harton School AGENDA n KEY ISSUES IN CREATING VALUE IN SUPPLIER-BUYER...

W Professor Jeff Dyer

harton School

AGENDAAGENDA

KEY ISSUES IN CREATING VALUE IN SUPPLIER-BUYER PARTNERSHIPS


harton School

HISTORICAL VISIONHISTORICAL VISION PARTNERSHIP VISIONPARTNERSHIP VISION

INTERNAL FOCUS

TOTAL SYSTEM ECONOMICS

30%

20%

50%

0%

20%

40%

60%

80%

100%

CUSTOMERECONOMICS

MY ECONOMICS

SUPPLIERECONOMICS

MY ECONOMICS


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CREATING VALUE BY FOCUSING CREATING VALUE BY FOCUSING ON THE SYSTEMON THE SYSTEM

VALUETO

CUSTOMERVALUE

TO CUSTOMER

VALUETO

SUPPLIER

VALUETO

SUPPLIER

TRADITIONAL RELATIONSHIP

STRATEGIC PARTNERSHIP


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KEY TO SUCCESS: KEY TO SUCCESS: EXPAND THE PIEEXPAND THE PIE

Leverage the full resources of partners to create value for the end customer

Work jointly with partners to lower total systems costs (optimize the system)


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LEVERAGING THE RESOURCES OF PARTNERSLEVERAGING THE RESOURCES OF PARTNERS

Top 35Affiliated Suppliers(5-6,000 Engineers)

ToyotaEngineering

(7,000 Engineers)

Remaining 250Tier I Suppliers(10-15,000 Engineers

Toyota can leverage its value creation resources by 5-15x by involving suppliers in the Extended Enterprise

W Professor Jeff Dyerharton School

Types of Costs that Vertical Alliances are Types of Costs that Vertical Alliances are Designed to ReduceDesigned to Reduce

Transaction costs Quality costs Product development costs Logistics costs (warehousing and

transportation) Inventory costs


Three Key Sources of Inter-firm Three Key Sources of Inter-firm Competitive AdvantageCompetitive Advantage

Dedicated Asset

Investments

Inter-firm Trust

Knowledge- Sharing Routines


“Just stay in the cab, Vern… maybe that bear’s hurt, and maybe he ain’t.”


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CREATING EFFECTIVE CREATING EFFECTIVE PARTNERSHIPSPARTNERSHIPS

Build trust Create multiple functional interfaces to

facilitate system learning Make dedicated/customized

investments


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BUILDING TRUSTBUILDING TRUST

Formal Mechanisms such as long term contracts, stock ownership, collateral bonds, are often necessary to signal a credible long term commitment to a partner.

Interorganizational Trust is often built on processes, not people. A partner is trustworthy if its interorganizational processes are understandable and predictable.

Informal Mechanisms such as reputation, personal trust, relational norms, are key to creating value over the long term. Formal mechanisms alone do not produce information sharing which is critical to partnering success.


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THE VALUE OF TRUSTTHE VALUE OF TRUST

Increases learninglearning (greater information sharing)

Increases customized investmentscustomized investments (willingness to risk tailored investments)

Increases speedspeed to quickly respond to market changes

Lowers transaction coststransaction costs


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THE COST OF MISTRUSTTHE COST OF MISTRUST

0%

10%

20%

30%

40%

50%

GM Ford Chrysler Toyota

Percent of face- to-face contact time with suppliers

Negotiating price/contract

Assigning blame for problems

47%

28%

21% 21%


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Build trust Create multiple interfaces to facilitate

learning throughout the network Make dedicated/customized

investments


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Toyota’s Supplier - Customer InterfaceToyota’s Supplier - Customer Interface

Surface Contact vs. Multiple-Point Contact(Correct)

Customer SupplierPoint Contact(Wrong)

TopExecu-tives

R & D

Manufacturing

TopExecu-tives

Quality AssuranceQuality Control

Purchasing

R & D

Manufacturing

Quality AssuranceQuality Control

Sales


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Effective Partnerships at P&G/Wal-MartEffective Partnerships at P&G/Wal-Mart

Merchandising Sales

Forecasting Forecasting

Inventory Management Inventory Management

Warehousing Warehousing

Transportation Transportation

Systems Systems

Marketing Marketing

Accounting/Finance Accounting/Finance


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Build trust Create multiple functional interfaces to

facilitate system learning Make dedicated/customized asset

investments


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TYPES OF DEDICATED ASSETSTYPES OF DEDICATED ASSETS

Dedicated Site InvestmentsDedicated Site Investments (locating plants in close proximity to economize on inventory, transportation, coordination costs).

Dedicated Physical/Process InvestmentsDedicated Physical/Process Investments (making relation-specific capital investments in machinery, tools, processes)

Dedicated Human InvestmentsDedicated Human Investments (dedicating personnel to develop relation-specific know-how and improve communication/ coordination)


Toyota Plant Configuration in Japan*Toyota Plant Configuration in Japan*

30 miles

6 miles

Motamachi, TC

Tahara, Nagoya

Affiliated Supplier Plants• Avg. distance of 30 miles• 43.5 weekly deliveries• 10,635 man days of face-to-face contact

• 12.5 guest engineers

* 1992 All plants are in Toyota City (TC) or Nagoya

Independent Supplier Plants• Avg. distance of 87 miles• 40.5 weekly deliveries• 3,764 mandays of face-to-

face contact

• 2.6 guest engineers

Tsutsumi, TC

3 miles

28 miles

1 mile

3 miles

Takaoka, TC

Honsha, TC

Headquarters & Technical Center


GM Plant Configuration in the United States*GM Plant Configuration in the United States*

200 miles

Lansing, MI

External Supplier Plants•Avg. distance of 427 miles•7.5 Weekly deliveries•1,107 man days of face-to-face contact

•.17 guest engineers

Flint, MI

Hamtramck, MI

Ypsilanti, MI

Internal Supplier Plants• Avg. distance of 350 miles

North Tarrytown, NY

Linden, NJ

Wilmington, DE

Lordstown, OH

Bowling Green, KY

Spring Hill, TN

Arlington, TX

Wentzville, MOKansas City, KS

Van Nuys, CA

Fremont, CA(Nummi)

650 miles

900 miles

455 miles

1400 miles

387 miles

2400 miles

51 miles55 miles

85 miles

* 1991Passenger car plants only (Mileage from 1990 Rand McNally Road Atlas)


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The Relationship Between Plant Distance The Relationship Between Plant Distance and Automaker Inventory Costsand Automaker Inventory Costs

0

0.01

0.02

0.03

0.04

0.050.06

0.07

0.08

0.09

0.1

0 100 200 300 400 500 600

To

tal

Inve

nto

ry a

s a

Pe

rce

nta

ge

of

Sa

les

Average Distance Between Supplier and Automaker Plants (In Miles)

Toyota

Nissan

GM Ford

Chrysler


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STRATEGIC SUPPLIER STRATEGIC SUPPLIER SEGMENTATIONSEGMENTATION

• Creating partnerships takes considerable time and resources on the part of both parties

• Not all purchased products offer the potential to lower systems costs, offer new technologies, or speed products to market

The optimal strategy requires different approaches with different types/ groups of suppliers/customers


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THE FUTURE….THE FUTURE….

Partnerships will become increasingly important for competitive advantage

Teams of companies will increasingly compete with other teams (extended enterprise); lean teams will win

Leveraging the full resources of the extended team will be critical

Leading companies will increasingly use partnerships--though not with all suppliers/customers

W Professor Jeff Dyer harton School AGENDA n KEY ISSUES IN CREATING VALUE IN SUPPLIER-BUYER...

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