Unseen Gains, Lost Profits

Every day, thousands of companies leave billions of dollars on the table, hard-earned dollars that could have appeared in lower consumer prices, exciting products or fatter shareholder returns. The losses are not leveraged cuts demanded by Lopez-type leaders, but invisible, unrealized savings that could put their organizations in the top tier of healthy, resilient supply management leaders. And every day, those same millions -- lost opportunities -- slip into someone else's pocket as the silver certificates flutter and drift farther away from their original owners. Profitable majors like Daimler/Chrysler, Honda of America, Harley-Davidson, IBM, and John Deere all recognize the power of profits realized when supply management professionals focus their attention on best practices in all areas of their operations, and these winners continue to reap the benefits of their intense cost focus. In these unique and powerful supply management leaders, the discipline of acquiring and moving material has become a key strategic advantage that enables lean manufacturing and responsive customer focus.

Unfortunately, although most industries cannot afford to let their profits blow away, many of them don't even notice the constant slipping away of cash. Sure, they have studied and struggled with MRP systems, ERP, outsourcing, and supplier development, and some of these techniques have produced temporary, noticeable gains. But their central focus is tuned to tracking everyday purchasing challenges of delivery and quality, and their peripheral vision is not engaged. Some of them may be too preoccupied with manufacturing to see the areas at other ends of the supply chain.

Opportunities for enormous savings in time and money lie at the far ends of the supply chain, most notably in procurement and design and development. In the middle, where manufacturing occupies a thin slice that converts an idea through the delivery process to consumable cash, processing operations account for an increasingly smaller slice of the continuum, because most world-class organizations have for the past fifteen years or so addressed and conquered manufacturing weak points. The problems of excess inventory, waste in the process, bad quality, inflexibility in scheduling, and a better and more professional workforce are well on their way to extinction. The expected result -- truly flexible, lean manufacturing -- will have been achieved among the winners in most manufacturing sectors within the next ten to twenty years or so.

What remains, therefore, is the challenge of bringing procurement in an extended enterprise into an equally powerful and responsive strategic position.

Manufacturing's Transformation

The past two hundred years have seen a long series of process and human innovations in the area of manufacturing, starting with Francis Cabot Lowell and Paul Moody's reintegration of the disparate textile processing functions in a single mill on the banks of the Charles River. These entrepreneurs, and a few other members of an enterprising elite called the Boston Manufacturing Company, realized 200 percent and more profits through use of simple economies of scale and expansion: bigger brick mills; longer days; faster machines; more workers; taking raw material -- cotton -- and carding, dying, weaving, rolling, and shipping finished goods from a single location. Issues around purchasing and logistics -- where and when to acquire the next raw material shipment, where to store the in-process goods, and how to ship out to a market screaming for North American goods -- were smaller questions than issues involving direct labor and the machinery that drove the looms. Innovation, therefore, centered on improving, which usually meant going faster, basic production operations. Workforce policies around productivity focused on speed rather than intelligence, perhaps even more than quality.

Limitations of Bigger, Faster Growth

This profit model preceded what we have come to call Taylorism, the perfected system of standards and incentives that further controlled and "improved" how human hands worked. Finally, as competitive threats shifted profits out of the Western world to Eastern production centers like Japan, North American manufacturing leaders adopted in quick succession a series of episodic moves toward better quality, MRP systems, workforce teams and profit sharing, reengineering, and finally lean manufacturing.

Purchasing -- Unscathed by "Improvements"

Still, although the huge improvement waves rolled through the ranks of manufacturing planners, purchasing remained relatively untouched. As late as the early 1990s, many organizations could point to no integrated systems assist that completely eliminated paperwork transactions, for example, or that linked purchasing to other production operations. Purchasing systems were an afterthought, frequently too complex to manage quickly or too awkward to change directions. Headlines about procurement tended to focus on cost-cutting drives and limited efforts to roll procurement into the picture.

The Manufacturing Continuum

To some degree, purchasing professionals have enjoyed a pleasant separation from other siloed functions; twenty years ago few buyers, for example, set foot in their shops or at their suppliers' sites. It was even possible to plan and manage entire commodities in the computer industry without ever having touched a motherboard or heard the hum of a disk drive. The typical buyer/planner's day centered on acquisition and tracking of materials at what was considered competitive prices. Strategically, few purchasing professionals participated in business planning decisions; tactically, purchasing planners, buyers, and expediters could not be overlooked because they frequently compensated for system and supplier failures -- missed performance in deliveries or quality -- a conflicted position from which no human could easily find resolution or progress.

Where manufacturing pioneers evidenced a dedication to bricks and mortar, and more and bigger machinery, purchasing studied and practiced the art of negotiation, business travel, gifting, and locating back-up supply strategies. For a few years, this approach worked, but as operations professionals redrew their landscape, procurement was challenged to get involved. Technology advances -- the CNC machine, the PLC, the personal computer, and the Toyota Production System -- took large chunks of direct and indirect labor dollars out of product processing and shifted the mix of labor to materials.

Further, as some companies examined their dedication to vertical integration, they migrated toward perfecting a few single competencies. They chose to "offload" certain processing steps, for example, "to the experts." Where companies like St. James Paper owned forests, shipped and stripped logs, and transported finished product on their own trucks, other commodity producers began to disinvest, freeing up cash to be more carefully applied among competing suppliers.

Shifting a percentage of in-house produced components and assemblies grew the second tier producers, which raised purchasing's strategic importance within large organizations. It is not unusual for final assembly producers to purchase over 50 percent of the components, making them the assembly and procurement experts and a world of specific commodity competitors. So as manufacturing trimmed down and tried to speed its own processes, procurement found itself with more of the dollar responsibilities for sourcing into final assembly plants, a task most purchasing professionals were unprepared for, and surprisingly, were somewhat blind to. The shift happened almost overnight.

Life Cycles -- From Seasons to Months, from Days to Hours...

The electronics world grew and adopted new technologies the way farmers used to plan and harvest crops. Computers, for example, during the seventies and eighties were built to a lurchy, spastic rhythm dictated by huge market swings and technology challenges. Pioneers struggled with the movement from core to semiconductor memories, proprietary software and extremely specialized equipment supported massive in-house production of everything from motherboards, to displays, to simple cable assemblies. Completely vertically integrated companies had essentially created a deadly mutual dependence between manufacturing and purchasing; manufacturing pros felt they were all-powerful and decisive, as did purchasing, but all were ruled by marketing and accounting gurus.

But when, in the mid-seventies, the twin stars of predictable, consistent quality aligned with leakage of technology to smaller company experts, the big computer makers -- Digital, Data General, Computervision, IBM -- found good reason to "get out of town," to outsource bigger and bigger pieces of their products. Who wanted to be in the business of forecasting, stocking, sourcing, building, storing, shipping, and redesigning thousands of varieties of cable assemblies, for example? Why not shift the burden to the folks who really wanted to be in that high-volume, custom business? That shift to outsourcing -- from 10 or 20 percent outsourced material to 50, 60, even 70 percent -- marked the rise of professional purchasing and supply management, the birth of the extended enterprise, and the need for this and the next generation's purchasing executives to rise to the challenge of becoming strategic enterprise leaders. Quite a challenge.

The Vision -- Supply Management Twenty Years Out

When Fujitsu joined with EMS (electronic management services) provider EFTC, of Denver, Colorado, the result was a movement in the electronics industry's restructuring -- the next stage -- that will take supply management professionals out of the world of purchasing into strategic sourcing that will direct sourcing and allocation of ideas, as well as materials. If what we see for the next twenty years happens as quickly as the demassification of vertically integrated electronics giants in manufacturing of the 1980s, we believe that purchasing is not ready for a shift of such amplitude.

The EFTC/Fujitsu alliance proves the point. Like another success story, EMC, the Massachusetts Miracle producers of high-end mass storage devices, EFTC started its corporate life in a less glamorous, dirtier career, making boards for big customers. The company discovered and enlarged on its repair and logistics talent to transform a piece of its business into an original equipment provider. In other words, EFTC made history in the computer world by taking on the assembly and order administration of Fujitsu computer orders through a third-party provider remote to Japan -- a Tennessee plant site. This restructuring of the building blocks of a typical computer introduced yet more demands on sourcing that sought to manage not only material being purchased, used, and shipped but also designs. Completing manufacturing in an area remote to headquarters is distributed, intelligent manufacturing; purchasing and supply management professionals must be able to support this new production method in other industry sectors all over the world. It is the biggest challenge procurement professionals have faced in over twenty years, and most of them are not ready. The shift for purchasing, therefore, over the past 150 years is historic:

E-Manufacturing (E-Man),sm Intelligent Manufacturing Distributed Globally

The progression of the procurement continuum visibly demonstrates several key challenges facing overwhelmed purchasing professionals today:

First, they must broaden their vision to understand and possibly direct the quick and perfect completion of many high-technology tasks.

Second, they must understand and broaden their vision, in preparation for leading their enterprise team in both material and intellectual property acquisition and use.

Third, they must continue to "mind the store" by working to chisel out better costs from more perfect process management -- they become technology as well as costing and communications experts, another seemingly impossible and gigantic challenge for a profession in transition.

An Impossibility?

With such seismic shifts under their feet, it would not be unreasonable for many purchasing professionals to pack up their cell phones and head out to the parking lot. Given the technological forces in their paths, however, they would soon find escape blocked by a number of barriers: the market, customers, systems developments, global competition, and internal competition from their "brother" functions -- manufacturing, engineering, design and development, and customer administration. Dazed and stumbling supply managers must come to understand that the earth is moving for everyone, and the safest survival tactic is not to duck and cover under your desk -- it is to run, dodge, and find the security of the right enterprise from which you can make forays into foreign territory.

The Extension of Excellence, the Next Procurement Challenge

Any process contracted for by a provider and intended to make customers happy belongs under the eye of procurement -- from the front end of the system, design and procurement, logistics, packaging, to customer service. Any processing of input -- ideas or material -- belongs in manufacturing unless that process is in itself outsourced, when it also falls into the management domain of supply managers guided by technology experts back home.

In Plain Sight

In clear view of such bottom line results as experienced every day by companies in our Top Ten list, winners like Honda, Daimler/Chrysler, Flextronics, IBM, and others, why do so many supply managers still struggle with the basics? Why do they appear to be so shortsighted and tactically driven by pieces and parts? Having wrung all the gains out of manufacturing facilities by perfecting efficiencies of flexibility and flow, quality and workforce improvements, too few are proficient in target costing, value engineering, and supplier development -- the "new basics of supply management."

These practices, as well as extension of excellence throughout the supply chain -- laterally, and downward into the second, third, and even fourth tiers -- remain the biggest challenge for supply management professionals of this decade.

It is time to throw out the college textbooks that detail how to market before the arrival of the Internet, or how to measure the value of labor via cost accounting, or even how to develop a forecast that takes its shaky place at the top level of a complex, push-driven MRP system. Fortunately, or perhaps unfortunately, because fewer academic programs have been created to train purchasing professionals, we are faced with a smaller stack of books to burn. A few dedicated innovators are changing the way markets function, and the way goods flow in and out of processing operations, and the way cash is farmed at the point of electronic capture. And they are effectively rewriting the supply management rules for a new group of process professionals.

Companies like Dell and Solectron are benchmarked innovators within their fields of final assembly and customer administration. Indeed, they are not far from achieving an integrated vision of manufacturing and supply in the year 2020. Their competition -- Compaq, Gateway, and smaller EMS suppliers -- have lost competitive advantage and must run twice as fast simply to stay in the race.

The 2020 Vision -- Intelligent Systems, Distributed Manufacturing, E-Mansm, and the Chinese Box

For those procurement executives drawn to adventure, let us paint a picture of the production function twenty years out. We call it the Island of Excellence, and it is a world torn by interenterprise rivalries, an area of prosperity bordered by a chasm marking the line between the excellent enterprise and The Others. There will be simply these two classes of enterprise, and the choices will be clear.

The Island of Excellence organization will do many things extremely well -- processing, idea movement, realtime customer design of product, and simultaneous production. The workforce and other resources required to fulfill customer needs will be technologically better prepared and trained than even the best facilities today, the ones typically found in Ph.D.-staffed Intel plants, for example. In the winners' circle, enterprise workers will appear as an elite corps united by their complete commitment to lifelong enterprise alignment. Their language, culture, clothing, training, hobbies, and families will all blend in a way not ever dreamed of in the post-World War II conformist 1950s.

The Island will present a picture of balance and harmony among well-trained corps of engineers and technology experts. People will live where they work and work where they live, much as they did in eighteenth-century factory villages.

The Chinese Box

Another earthshaking redesign of the manufacturing process should reinforce our new vision of the procurement professional. Picture a complex molded resin product, a twenty-one-foot speedboat, for example. Traditional manufacturing and procurement require weeks of advance planning, slotting, layup, grinding, polishing, and trip work before the unit can be completed. Further, the process is fraught with possible quality issues, and rework and repair take additional time. Boat making, even in the fiberglass sport arena, is an art enveloped by science.

Remote, Distributed Manufacturing

Enter the Chinese Box, an automated, portable, perfectly consistent trailer-sized production unit that produces boats or bathtubs, custom colored, to customer orders, in hours rather than weeks or months. The possibilities for new designs and varying applications loom on a horizon that twenty years from now will be populated by manufacturing on wheels and electronic sourcing. Who will be the keepers of the design instructions and the processing formulas? What unit in the advanced manufacturing group will control the acquisition of raw materials and resources? Quite probably the superhero of our story, the fully prepared and highly leveraged supply management professional.

rFor other living examples of the Chinese Box that extend the possibilities into small appliance production -- VCRs, TVs, communication boxes, textiles, and other customer-designed apparel -- all that will be required will be smaller active replication centers, like the sport boat example, drawn from Pyramid Molding in Greenville, Pennsylvania. Replication units enjoy the benefit of movement; boxes can be helicoptered to Third World countries that have limited internal manufacturing resources, or they can be set up on Antarctic bases, or even in space.

Remote, Intelligent Manufacturing

Earthbound, family-centered operations with a power source and wheels will be capable of downloaded licensed product design and process data from the Internet, for immediate located production. And supply management professionals will be in charge of maintaining ownership of localized manufacturing intelligence.

At Long Last...

For purchasing professionals, the picture of long-anticipated levels of professionalism will be welcome. Their strategic positions within the enterprise will signal finally the accomplishment of long overdue dreams. And for those fortunate and extremely well-directed associates on the Island, this enterprise will indeed be a dream come true.

And for the Others...

But for the sad inhabitants of groups on the other side of the chasm, the daily struggle to make things -- marginally useful kitchen appliances, hastily assembled three-wheeled motor vehicles, plastic dolls, and entertainment chips -- will bring out all the worst qualities of a struggling, underpowered lower-class paradise. Health, safety, education, food, entertainment will all be marked with a scratched plastic veneer of second-class cheapness, and workers will appear to have a jumpy, unrestrained muscle movement suggestive of pharmaceutical deprivation and lack of exercise. The contrast between life on the Island and across the chasm with The Others is so clear that choices will hopefully be made at birth, choices and paths guaranteeing lifetime affiliation with the Island. Because with no border zone and little hope for undereducated and undercontrolled workers to bludgeon their way to the top tier, the remaining inhabitants of Mad Max's world will enjoy short, unpleasant lives marked by chaos and a never-ending struggle, a kind of twenty-first-century 7th ring of Hell. For purchasing and manufacturing professionals, we urge, make your choice, prepare well, and don't look back.

Beyond World Class

One of the most overused phrases from the 1980s is "world-class" -- a nonspecific, overly defined view toward enterprise excellence coined in reaction to global competition's wake-up call. Over time, we have developed our own understanding of what constitutes world-class supply management. World-class organizations share the following traits:

1. Top leadership understands purchasing's importance and provides needed resources.
   
   
2. Benchmarking is used to assess performance and set tough goals.
   
   
3. A culture of shared knowledge prevails -- collaboration flourishes internally and with suppliers.
   
   
4. The view of supply management includes the entire supply chain.
   
   
5. Best practices are institutionalized.
   
   

Clearly, commitment from top leadership is vital to sustain world-class supply management. But world-class organizations don't wait for the CEO to get on board. They make sure that supply management's agenda becomes part of the CEO's plan.

World-class supply management organizations use internal and external benchmarking to gain perspective about overall performance. But they don't stop there. They use that information to establish tough supply chain objectives and metrics. They reward, rather than punish, the risk-taking necessary to meet these goals.

Best Practice organizations recognize that no individual -- and no single partner in a business relationship -- has all the answers. They share knowledge tapped from the supply chain and their own companies to understand and meet customer needs.

They do not view supply management as a functional silo. They understand that the dynamics of organizations and different groups must work together as an extended enterprise.

Finally, world-class supply management organizations use Best Practices to continually improve. A short survey asking fifty purchasing execs to name the practices that in their opinion were the most important yielded these responses:

1. Cost management
   
   
2. Supplier development
   
   
3. Value analysis/engineering
   
   
4. Maintenance, repair, and operating supplies (MRO)
   
   
5. Supplier quality circles
   
   

Exponential Excellence

The real power of Best Practices derives from applying them at more than one level of the supply chain. World-class procurement professionals not only seek out the best today -- the best suppliers, the best improvement aids, the best metrics -- but also seek to understand and see what is coming tomorrow, no matter how challenging and surprising the vision may be.

The Performance Gap

Clearly, there is a big gap between the reality of what most supply management organizations are now doing and their great potential to contribute enormous growth and savings that fall immediately to their bottom line.

But leading supply management organizations, companies like Honda, Harley-Davidson, and Flextronics that understand and focus on Best Practices understand the power and energy trapped in their supply management organizations. They work hard to unleash the terrific financial potential in every one of their supply management centers. These companies want to be smart and rich, and we call them the Top Ten.

Two other young organizations attracted our attention -- Intellimet, a start-up in Arizona, and a nonprofit think tank, NISCI (National Initiative for Supply Chain Integration). Each of these groups has created innovation much needed by supply chain management, and each of them continues to tackle bigger challenges that can only benefit industry.

Top Ten, Excellence in Supply Chain Management

Each of the Top Ten companies can point to at least one area of outstanding excellence, the kind of performance that breaks records in innovation and causes competitors to scramble for a quick win.

• American Express shines in breakthrough computer systems and creative new product ideas.
  
  
• SmithKline Beecham's procurement organization is structured to run aggressively after commodity market goals and metrics.
  
  
• Daimler/Chrysler enjoys a well-deserved reputation among its supply base partners for trusting relationships, especially in the area of platform teams and savings shared under the program called SCORE.
  
  
• Harley-Davidson/Buell is an exciting story of an American company living its fourth new life, as is
  
  
• IBM, a continuously amazing source of innovation and purchasing power in a complex organization.
  
  
• Honda of America, of course, set the benchmark for supplier development and training, which has been met and bettered by John Deere (indeed, quite a few Honda veterans have found their way out of transplant territory in Ohio up to Iowa's all-American soil).
  
  
• John Deere, in our opinion, has now passed Honda of America in supplier development strength. Testimony from seven supplier companies who have experienced the Deere development method, among other customer programs, support the validity of the process and its results.
  
  
• Whirlpool, in an incredibly tough global market, continues to aggressively leverage purchasing and cost management skills that positioned them as the number one.
  
  
• Flextronics, a California start-up run by CEO and grand visionary Michael Marks, moved quickly and quietly to invent systems for procurement that locked in superior partnerships with companies like Cisco, 3Com, Hewlett-Packard, and others.
  
  
• Sun Microsystems, a matured start-up that won the 1996 Purchasing Medal of Excellence, continues to innovate in its partnerships with suppliers, its new applications and creativity around systems, and its continued focus on networking issues.
  
  

Finally, the nonprofit supply chain think tank NISCI and Arizona start-up Intellimet are included as honorable mentions because of the innovation they continue to bring to supply chain management. To NISCI's dedicated members -- companies like IBM, Trane, Daimler/Chrysler, and Harley-Davidson -- NISCI represents an absolutely necessary coming together of the highest-level executives in North America's most influential procurement positions to change the world of supply base management.

NISCI

NISCI CEO Mike Doyle, as well as members of the group, recognize that the company is taking a high-risk approach to reformation of their profession. Since the beginning, when founding members like Honda coughed up $60,000 for membership, everyone felt that this coming together, although overdue, would be a management challenge. And members have not been disappointed as each took on a critical supply chain challenge. Harley-Davidson, for example, worked through an entire chain on a trust model. Next on the list of tasks facing NISC is a more complex challenge -- understanding and measuring the entire economics flow of a complete supply chain, including efficiencies, money flows, blockages, and hidden problems -- supplier development at the macro level.

Co-author Dave Nelson believes early NISCI experience with its trust building across the chain software had an unexpected benefit: participants learned that in some areas, "You may never have trust, but you damn well will have a system" -- simulation and realtime control systems, for example.

Chrysler, for instance, has credited its SCORE program with cutting thousands of dollars in costs on a single new vehicle, while Honda of America points to its 1998 Accord, a totally redesigned vehicle, as a brilliant example of the power of strategic sourcing; this one vehicle cashed in on over 26 percent in purchased cost savings. John Deere's Best Practices initiative, a program similar to Honda's, recaptured millions of "lost" savings opportunities within months of its start-up.

Purchasers Speak

We surveyed 247 heads of purchasing and supply management at companies -- OEs (original equipment producers) and suppliers -- headquartered or operating in North America, and we found amazing similarities in their responses to questions about Best Practices. We wanted to understand what makes their procurement groups so effective and what areas of their operation are the most important to procurement and supply chain success. We started by reviewing our respondents' priority ranking on about thirty Best Practices. Gradually, the Best Practice list trimmed down to approximately twenty key areas of competence.

Next, co-authors Nelson, Moody, and Stegner followed up responses to our survey questionnaire with over one thousand hours of interviews and site visits; not surprisingly, the interviews and visits pretty much confirmed company leadership's perspective on their relative performance. Although respondents were not made aware of their comparative ranking, most executives "knew" where their groups were on the excellence journey, what they did well, and where they had considerable challenges.

Manufacturing Precedes Procurement in Best Practice

We visited all the top contenders for the Top Ten, and we can say that the "performance gap" -- the gap between what companies and their suppliers are capable of achieving and what they currently demonstrate through their cost controls, quality performance, and customer responsiveness -- is real.

Unfortunately, most North American purchasing groups have trailed the progress made in manufacturing as the movement into Best Practice -- away from a purely tactical focus -- has taken longer to catch on. We are not clear on all the exact causes of this gap between manufacturing and procurement, but we think that the answer may be quite simple: as manufacturing groups have learned and moved ahead with innovative, better methods -- like Six Sigma quality, kaizen, or lean manufacturing -- they have hit the operations side of manufacturing first, shop floor followed by white-collar areas such as engineering, new product design, and order administration.

Drivers for improvement have rippled out laterally to what may at the time have been considered the second targets for improvement -- "collateral" groups like purchasing, logistics, and order administration. We think that this priority for change is flawed, given the uneven distribution of money and other resources in manufacturing, compared with order administration, for example, but as a rule this is the pattern that most companies have followed.

Visual Excellence

Further, we noted as we visited organizations throughout a range of industries -- aircraft, automotive, pharmaceuticals, electronics, foods -- as well as first, second, and third tier suppliers, that high performance is somewhat predictable from a good look at the surroundings. In other words, if the data and the survey indicated that an organization was a possible Best Practice procurement leader, it was usually true that a visit to the plant with some time spent in purchasing and out on the shop floor would also reflect a predictably high performance level. Excellence tends to shine throughout an organization, even though there may be some unevenness among pockets of high performance in purchasing or operations, for example.

Benchmarking the Best

Toyota and its suppliers, for example, tend to model all their processing on the Toyota Production System guidelines; one would naturally expect to see excellent housekeeping, ergonomic improvements, and perfectly designed lines and work cells. Even at the first and second tier levels, usually that is what we see. And within procurement, among the planners and suppliers for the material that flows down these lines and through the work cells, we tend to find the same attention to detail, the same quality and performance measurements that guarantee consistently good practices.

Struggling for Profits

Companies at the other end of the performance gap, unnamed organizations struggling with overwhelming performance challenges, primarily in quality and delivery, can't seem to get control of their own processes. We visited a big, very profitable producer of high-end cabinetry. This southeastern producer offers unlimited variety in a strong consumer market that will hopefully carry them well into the next millennium; they enjoy the advantage of relatively cheap and available raw material and a semi-educated workforce. But operations like production and purchasing clearly occupy lower priorities than marketing and sales.

The performance gap assaults the senses the moment a visitor steps foot in this plant. The air is filled with sawdust; health and safety violations abound that in an earlier era would have seen OSHA on their doorstep daily; expediters on foot and in a fleet of fork trucks keep lines flowing from final assembly, an erratically unpredictable flow, all the way to raw material cutting operations. Moreover, inventories at all levels of processing fill every square foot of racks and side aisle storage, as tractor trailers line up in the parking lot to disgorge days' worth of raw material input. This supply management nightmare will continue as long as the market holds up. Because although this company is leaving hundreds of thousands of dollars of waste -- lost material, unnecessary movement and processing, bad quality, and missed delivery dates -- on the floor, as long as customers are willing to wait two, three, or even four months for their complete orders, nothing is driving management to make any major "disruptive changes," and all this is clear to the trained visitor within fifteen minutes of arrival.

Manufacturing Is Hardwired to Procurement

Bad processes breed bad quality, missed deliveries, painful new product introductions, and missed profit opportunities. There is a direct connection between excellence in manufacturing operations -- single-minded dedication to quality such as we see every day at Honda, for example -- and quality metrics in the supply base that are rewarded with increased business and supplier recognition conference awards.

There is a direct connection between making the delivery schedule with no "just-in-case" excess days, as most automotive assemblers and their suppliers know, and their ability to manage high-performance logistics suppliers. In North America particularly, the location and travel requirements for managing suppliers located twenty-four hours or more away is challenging. It takes the very best purchasing and logistics people and systems to bring in seats from Michigan, carburetor assemblies from Tennessee, and radios from Mexico, to keep lines moving at the rate of one perfect vehicle every minute.

Bad Practices Cost Millions

Bad performance at any one of the many stages of production -- at the final assembly line, at the first tier carburetor assembly plant, even at the machine parts level -- is expensive. At one Midwest transplant the cost of stopping the assembly line for just one minute is $26,000. With six lines running, the price tag for output down time is well over $150,000 per minute. Every day that suppliers produce bad parts that must be recycled for repair or discarded, every minute that operators must stop their work and consult with materials and purchasing buyers about in-transit missing pieces, and every day that trucks continue to transport significant excess materials carried on the books as "in-transit inventory" reinforces the cost of the performance gap between what purchasing is for many North American organizations and what it could be.

Last year, visiting an engine supplier to a major OEM, we walked into an atmosphere of anger and denial. It seems that the president felt that they could not earn their 5 percent after-tax profit. The supplier felt they were being squeezed by their biggest customer for big cost cuts; their relationship was at rock bottom, and even the customer's purchasing vice president acknowledged that this supplier was only barely making the grade.

With such negative findings, we knew that this customer could be hard-pressed to find a way to reach their own desired quality, delivery, and price performance goals. This was an unhappy conclusion to a fifteen-year partnership, and it was caused by a customer that demanded price cuts -- in blood -- and ignored all the other valued performance benefits that this supplier had been producing. In the end, the customer won their price cuts but also lost cooperation, design input, and above-average delivery performance.

The supplier was unwilling to go the extra mile for this customer, because they felt they had been violated. The bottom line is that companies will gain tremendous savings, not 5 or 6 percent cost cuts, when they attack the seven wastes, reduce manpower and inventory, and practice continuous improvement. They will achieve better yield on raw materials as specifications improve. The gains from all these changes add up to at least 25 percent of total purchasing costs, a huge amount of unrealized profit potential for even the smallest supplier.

The postscript to this story is that the new vice president of purchasing understood where the relationship with his engine supplier had gone wrong, and he worked quickly to reverse the damage. He traveled the following day to the supplier's plant and offered them a "price up" -- unheard of among this level of suppliers -- he would meet their demands of a 5 percent price increase to satisfy the lost 5 percent after-tax profit, in exchange for a new commitment to work with him, shoulder to shoulder, to wring the real excess costs out of the process. The VP knew that no matter what the level of improvements, they would realize 10 to 15 percent gains with reasonable attention to the task, totaling tens of millions of dollars of improvements in quality and delivery, as well as development speed. Further, the development speed that the customer and supplier generate together would move both businesses along, well out of the marginal operations into the first tier of excellent performers. What a reversal!

Excellence Can Be Replicated

We believe that if companies address purchasing Best Practices the way the high performers have for the past ten or fifteen years, they will experience the same remarkable results that adopters of JIT, lean principles, the Toyota Production System, and Six Sigma quality have experienced. We know that when companies put procurement and development of a high-performance supply base in the center of the universe, at the heart of their list of change initiatives, they will attract and retain better purchasing leaders and more responsive suppliers. And as the Top Ten organizations are proving every day, when companies deliberately, with speed and thoroughness, bring performance excellence into their purchasing organizations, the millions of unclaimed dollars left lying on the table every year by unaware producers will find good homes in the bottom line of reenergized supply management leaders.

What we call "leveling up" is a great challenge for most organizations, but as Honda, Toyota, and their suppliers are proving every day, it is not an impossible one.

Quality measured in parts per million rejected among the leaders continues to improve exponentially; a Six Sigma goal of 99.996 percent perfection translates to 3.4 defects per million. Delivery performance, an on-time measurement that typically looks at days before and after the committed delivery date, is a direct reflection of cost of expediting and cost of lost customer orders; here the performance gap, the difference between 90 percent performance to promise or better and only three-quarters of orders delivered to promise, becomes painfully obvious in the wasted profits spent on premium tracking, expediters, and overtime at the bad performance level. You cannot run a very profitable facility when three quarters of incoming material isn't there, or when over a month of twelve months' potential profits sits untouched in inventory.

The last metric, training hours per person, at first glance seems to indicate enormous differences from one company to another. Companies with a long history of well-structured and well-funded in-house universities, like Motorola University and the Nypro Institute, believe that to retain a professional workforce, serious training initiatives are an absolute requirement. They would not agree, however, on how much funding is required to deliver the training. This is one area that should encourage small and medium-sized suppliers, because with careful, piggybacked initiatives, like Web-based training, and curriculum shared with established colleges and universities, they have found ways to deliver high-quality and cheaper training to more workers without establishing a bricks-and-mortar, dedicated in-house operation.

When organizations compare the performance of the Top Ten to their own demonstrated current performance and to the unrealized potential of their own people, they will undoubtedly be surprised, not just by the range of improvement possible with a small amount of attention focused on the right places, but with the excitement and positive energies unleashed when people are encouraged to do better. But we understand that moving a single organization, and then an entire supply chain, along an aggressive improvement journey that started about 150 years ago in manufacturing, can be a blinding challenge for a single dedicated individual. We don't recommend that anyone attempt this alone. It will take a small team of focused, multiskilled professionals to attempt any of our Twenty Best Practices.

Be forewarned: some of the Twenty Best Practices will show results immediately, and others will reveal great potential only after first-pass efforts. Certainly improving quality and delivery is easier when performance is in the low 50 or 60 percent range -- any improvement is bound to realize big results -- but once organizations move into the high 90 percent range, close to Six Sigma and zero defects, they must completely understand their process and their supplier's process. They will need to carefully evaluate new technologies for performance potential, and they will demand superior systems to extend the limitations of the human hand, eye, and mind.

A Superhuman Challenge?

This is an enormous challenge, not an impossible one. In the next chapter, we take you through the Twenty Best Practices and the companies that have closed their performance gaps by perfecting them. Not all Top Ten Practice companies excel in all Twenty Best Practices; Honda of America has enjoyed a superior reputation in quality training and quality performance, but its computerized systems have always lagged behind other large-vehicle producers' systems.

American Express, however, is brilliant at data management, but its business tends not to involve actual conversion of raw material through processing into shippable products. And among our long list of possible Best Practice groups, we surprised ourselves by uncovering Wild Cards like Buell Motorcycles, now joined with Harley-Davidson, and Auburn Industries, the seat of great systems innovation in the John Deere supply base -- smaller organizations whose innovation and energy gained them recognition in certain outstanding performance characteristics, but whose overall operating performance still does not match the smooth and consistent superior performance that marks their more established colleagues and competitors.

Copyright © 2001 by Dave Nelson, Patricia E. Moody, and Jonathan Stegner