MBA6028 WCU Dont Let Your Supply Chain Control Your Business Summary Please help me with my question that I have as an assignment that is due Sunday at mid

MBA6028 WCU Dont Let Your Supply Chain Control Your Business Summary Please help me with my question that I have as an assignment that is due Sunday at midnight. Please Summarize the key lessons and takeaways from the article at least 250 words. Since it is only 250 it does not need to go to in depth, just a general overview. The answer just has to be at least 250 words no citation or anything. HBR.ORG
DECemBER 2011
reprint R1112H
Don’t Let Your Supply
Chain Control Your
Business
Manufacturers are delegating too much power to
top-tier suppliers, undermining their own ability
to innovate, cut costs, and manage risk.
by Thomas Choi and Tom Linton
Don’t Let
Your Supply
Chain Control
Your Business
Manufacturers are delegating too much power to top-tier
suppliers, undermining their own ability to innovate, cut
costs, and manage risk. by Thomas Choi and Tom Linton
2 Harvard Business Review December 2011
For article reprints call 800-988-0886 or 617-783-7500, or visit hbr.org
Illustration: brett Ryder
I
n the past 25 years, major originalequipment manufacturers around
the world have shifted to the Japanese tiered approach to supply chains.
They’ve radically reduced the number of
suppliers that they directly manage and
off-loaded responsibility for supervising
the rest, along with the task of building
major subsystems, to a handful of firsttier suppliers. The attractions for OEMs
were faster new-product introductions, larger volume discounts, reductions in the capital and risks associated with developing and producing the subsystems, and the ability to spend less management time
on overseeing the multitude of lower-tier suppliers
and more on building core competencies.
But we believe that the delegation has gone too
far. Our conclusion is based on studies of the practices at some 20 leading multinational corporations
that one of us (Thomas Choi) conducted and the
longtime experience that the other (Tom Linton)
has had as a purchasing executive at such companies as LG Electronics (LGE), Agere Systems, Free­
scale Semiconductor, and IBM. We discovered that
a heavy reliance on first-tier suppliers is dangerous for OEMs. It weakens their control over costs,
reduces their ability to stay on top of technology developments and shifts in demand,
and makes it difficult to ensure that their suppliers are operating in a socially and environmentally sustainable fashion. The remedy is for OEMs
to forge direct relationships with a select number
of lower-tier suppliers, and in this article, we’ll explain how.
The Dangers
But first, let’s look at the risks of giving top-tier suppliers too much responsibility.
Less control over costs. Managers of large
OEMs assume that they can save money by outsourcing the design and production of major supply
subsystems. But here’s what happens when a company delegates considerable control over a product’s
bill of materials: The total costs of ownership of the
product (including such things as transportation and
inventory management) become opaque to the OEM.
And, as some manufacturers found out the hard way
during the recent recession, that means the company has little leverage to reduce costs—especially
if it has handed over an entire subsystem to a single
supplier and can’t quickly stage a competition or
switch suppliers.
December 2011 Harvard Business Review 3
Don’t Let Your Supply Chain Control Your Business
Managers also need to factor in various hidden
costs. One is the resources and time required to investigate and resolve problems rooted in lower-tier
suppliers. Another is quality. Honda of America
learned that when it allowed top-tier suppliers to select their own vendors of plastic parts, the textures
and colors of the parts often didn’t match, because
their makers bought resins from different companies.
Less visibility into technology develop­
ments. Lower-tier suppliers can provide valuable
information about the latest manufacturing advances and technological innovations. In consumer
electronics, for example, having direct access to the
newest ideas of chip-design houses, which often are
second- or third-tier suppliers, is critical. Such access has enabled companies like Apple and LGE to
influence the development of emerging technologies, incorporate them into products before their
rivals do, and secure supplies at an advantageous
price. Conversely, companies that lack such access
have found themselves reacting to competitors’ innovations and struggling to match their features
and prices. We have seen the same pattern in other
industries, including aerospace, automobiles, and
telecommunications-network equipment.
Less access to market information. Lowertier suppliers that serve a number of markets sometimes spot shifts in the economy early. OEMs that
don’t have close relationships with such suppliers
can miss opportunities to adjust orders and lock
in favorable prices for parts and materials, losing
ground to more-astute competitors. This happened
in the consumer electronics industry in early 2009,
when a number of companies didn’t realize that
4 Harvard Business Review December 2011
demand for semiconductors was about to rebound.
(Read on for more about that.)
Less control over sustainability. Environmentally and socially sensitive consumers are increasingly holding manufacturers accountable for
the performance of their individual suppliers. (See
“Don’t Tweak Your Supply Chain—Rethink It End
to End,” HBR October 2010.) For example, the
massive contamination of the Pearl River
Delta area in China by suppliers to the denim
industry had the potential to damage the image of Western apparel makers, and suicides
at a Chinese contract manufacturer used by
Dell, Hewlett-Packard, and Apple could have
tainted those companies’ brands. As technology
makes the supply chain much more transparent to
end customers (see “The Transparent Supply Chain,”
HBR October 2010), more and more companies will
face the fallout from their suppliers’ misbehavior.
Many OEMs incorrectly believe that creating an
approved vendor list (of the companies from which
top-tier suppliers are supposed to buy parts and materials) will protect them from the dangers described
above. But this common practice poses potential
problems. First, ensuring that top-tier suppliers
abide by the list is easier said than done. They will
naturally look for ways to depart from the list when
it’s in their interest—for example, if they can boost
their profits by getting a better price from another
subcontractor or can obtain a volume discount by
pooling orders from several OEM customers. What’s
more, having a comprehensive approved vendor list
can make it easier for a top-tier supplier to build a
business that competes with its OEM customer.
But in our view, not having a list poses bigger
risks. Left to their own devices, top-tier suppliers
will likely keep most if not all of the cost savings they
wring from the lower tiers. In addition, the lack of a
list can make it much more difficult for an OEM to
switch top-tier suppliers. The OEM would then be
changing not just the one company but the entire
supply chain beyond that firm. Also, when OEMs
don’t have an approved vendor list, the loyalty of
the subcontractors typically shifts to the top-tier
supplier.
Even with an approved vendor list, an OEM may
put itself at risk if it delegates the management of
lower-tier vendors to the top-tier supplier—as a
large aerospace manufacturer discovered when it
stopped buying raw material directly for one of its
top-tier suppliers. That supplier then developed
For article reprints call 800-988-0886 or 617-783-7500, or visit hbr.org
Idea in Brief
Big original-equipment
manufacturers have gone
too far in delegating
management of lower-tier
vendors to top-tier suppliers.
By doing so, OEMs have weakened their
control over costs, reduced their ability to
stay on top of technology developments and
shifts in demand, and made it more difficult
to ensure that suppliers are operating in a
sustainable fashion.
a close relationship with the raw-material vendor.
When the aerospace company wanted to switch to
a new top-tier supplier and asked a prospective candidate to submit a proposal, the candidate contacted
the raw-material vendor for a price quote, and the
vendor leaked word to the incumbent top-tier supplier. The result: The incumbent purposely kept its
inventory of finished parts for the aerospace manufacturer so low that the manufacturer couldn’t make
the transition to a different supplier.
So what’s the answer? An OEM should have a list,
be vigilant about getting suppliers to abide by it as
much as possible, and directly manage relationships
with select lower-tier suppliers itself.
How to Choose
Best-practice companies such as Apple, Dell, HP,
Honda, IBM, LGE, and Toyota do what we just advised: They have approved vendor lists but never
completely relinquish decisions about a product’s
components and materials to top-tier suppliers.
They carefully determine which items they should
directly source themselves and which they should
totally delegate. Here are some guidelines:
Retain control over items that have the most
significant impact on the total cost of goods
sold. Typically, 20% of the items on the list of a prod-
uct’s parts and materials—the bill of materials, or
BOM—account for 80% of the total cost. A standard
mobile phone, for example, contains two or three
semiconductors and an LCD screen that represent
more than 50% of its total BOM cost. Usually, even a
1% reduction in the price of such items translates into
The remedy: OEMs should selectively re­
establish direct relationships with lower-tier
suppliers. These include suppliers that have
the most significant impact on the total cost
of goods sold, are leaders in developing innovative solutions, pose the biggest sustainability risks, and can provide early information on impending shifts in the economy.
considerable savings. If decisions about purchasing
them are turned over to a first-tier supplier, it might
make changes to the BOM that are not in the OEM’s
best interest. For instance, that supplier might try to
replace a key part with one that is used in a competing OEM’s product, which could lead to problems: In
times of high demand, the supplier of the part might
put the other OEM’s needs first.
Manufacturers that retained control over their
BOMs, developed deep knowledge of the critical
costs in their supply chains, and selectively maintained direct ties with lower-tier suppliers were able
to react quickly when the Great Recession occurred.
Take LGE. In 2009, its 18 major commodity teams
worked with about 300 top- and lower-tier suppliers to reduce costs in a way that everyone felt was
fair—and found savings of more than $6 billion. One
such collaboration resulted in the revelation that the
power cords on LGE’s products were longer than
those on competitors’ offerings. Shortening the
cords and standardizing their color (making them
all black) saved $10 million annually. In another case,
an LGE-Qualcomm team figured out how to combine on one chip functions that had previously been
performed on multiple chips, eliminating the need
for several components.
Had LGE merely imposed a unilateral price reduction on top-tier suppliers, as many OEMs do, it could
never have realized such large savings and probably
would have alienated critical top-tier suppliers.
Consider a supplier’s innovation potential.
In emerging markets in general and in India, China,
and Taiwan in particular, the rapid growth in the
Lower-tier suppliers that serve a number of
markets often spot shifts in the economy early
on—and can warn customers about them.
December 2011 Harvard Business Review 5
Don’t Let Your Supply Chain Control Your Business
The companies that supply important
technology might not necessarily account for
the highest-cost materials for a product.
number of college graduates is spawning a network
of creative new suppliers. But OEMs that have outsourced purchasing and cut their own purchasing
staffs might not be able to spot these up-and-comers.
If a particular supplier shows promise, an OEM
should consider retaining control over that relationship. While this might seem obvious, a lot of companies don’t do it—mainly because they are focused
too much on bottom-line issues and too little on how
suppliers could help them innovate.
Managers should remember that the suppliers of
important technology might not necessarily be those
currently responsible for the highest-cost items on
the BOM. A case in point is human-machine interface (HMI) technology, which makes the operation of
products more intuitive. Five years ago the suppliers
that delivered HMI-related software and design work
did not represent a significant portion of a product’s
total cost. But Apple, for one, felt that HMI technologies would play a strategic role in future products, so
it maintained close relationships with companies in
that domain. That was wise: HMI technologies now
account for more than 40% of the iPad 2’s total cost,
according to iSuppli, a market research firm.
How can an OEM identify inventive lower-tier
suppliers? One way is to look for suppliers that have
been especially successful at reducing the cost of
what they produce. Cost innovators usually are also
technology innovators. Another is to look for suppliers that serve multiple industries and whose vendors
also serve several industries. They typically are exposed to a wide diversity of ideas.
Take into account the environmental and
social impact of parts, including the processes
used to produce them. We suggest that in addi-
tion to using approved vendor lists, OEMs employ an
updated form of value analysis when making sourcing decisions—including which items top-tier suppliers will be allowed to purchase on their own. Traditionally, value analysis has focused on maintaining
the functionality of a product while reducing its cost.
The new sustainable value analysis focuses on maintaining the functionality and cost of a product while
reducing its negative effects on the environment.
6 Harvard Business Review December 2011
This kind of analysis led IKEA to learn how to
design and manufacture furniture from wood with
knots, which in the past had been considered waste.
The move reduced the environmental impact of
IKEA’s furniture and significantly lowered its cost.
Similarly, LGE swapped the metal it used for the
back panel of its TVs for a plastic composite, thereby
decreasing the environmental impact, weight, and
cost of those products.
Stay close to vendors that can provide early
information on shifts in the economy. These also
tend to be firms that serve a wide range of industries,
such as Taiwan Semiconductor Manufacturing Company (TSMC). In January 2009, LGE bypassed toptier supplier Qualcomm and established a direct tie
with TSMC, one of the world’s largest chip foundries.
Concerns that Qualcomm wasn’t passing on the savings from then-plunging chip prices and uncertainty
about what would happen to the global economy
that year prompted Tom Linton, who was then LGE’s
chief procurement officer, to take this step. In the
first quarter LGE learned that TSMC’s orders from a
large number of industries were picking up, that its
capacity was tightening, and that lead times were
increasing. Those were all indicators that the global
economy was going to rebound in 2009, sooner than
many anticipated. In response, LGE rushed to negotiate deals with suppliers and was able to lock in cost
savings before prices rose. Caught off guard, a number of competitors couldn’t do the same.
An OEM can forge direct ties with lower-tier suppliers in a number of ways. It can build informal personal relationships with the suppliers’ executives
even if it doesn’t have contracts with those companies. Alternatively, it can establish a formal agreement. Honda of America and Toyota, for example,
negotiate contracts with select lower-tier vendors,
and then order their top-tier suppliers to use those
vendors exclusively and execute the terms. (See the
exhibit “A Model Supply Chain.”)
Revamping Purchasing
Switching to the approach to supply chain management that we’ve described may require OEMs to
For article reprints call 800-988-0886 or 617-783-7500, or visit hbr.org
A Model Supply Chain
Honda of America often contracts directly with key second- and third-tier
vendors and then asks its top-tier suppliers to receive the contracted parts
from those vendors. In essence, Honda is asking the top-tier suppliers to
manage those vendors for quality and delivery, while it manages them in areas
related to cost and technology. The diagram below illustrates how this works
in the portion of the Honda Accord Center’s supply chain that has been delegated to its console assembly company. (Note that all suppliers’ names have
been disguised to provide anonymity.)
This approach allows Honda to be efficient but retain control over vendors
that have a significant impact on cost and quality. Honda protects itself against
risks with the remaining lower-tier suppliers by requiring that most of them
be chosen from its approved vendor list.
second tier
JFC
Side sill garnish
TO CONTROL FOR
STANDARDIZATION
Hartzell supplies
fasteners that are used
across several of the car­
maker’s product lines.
hartZELL
Metal clips
AVANA Bolt
Yamamoru
Cosmic Trim Inc.
Leather topcoat
howard
Coatings
Paint, lacquer, thinner
FUJIWARA
Printing
Thermoject film
FILMCO
top-tier
supplier
Antimutilation film
STICK CORP.
Console
Assembly
Company
Adhesive, curing agent
BOSTON SEAL
Padding, seal
LOON
Technologies
Felt, nonwoven fabric
MEADOW
Products Group
Glove box stopper, lid
OCEANIC
Tool & Die
Bracket center console
GLM
Armrest assembly
To CONTROL
FOR QUALITY
Honda has appointed
Nippon Trading to control
the sources of raw
materials.
aTLANTA Inc.
third tier
MurphY
Finishing
Plating
fourth tier
CASTLE
reshape their purchasing functions. Manufacturers
that radically shrank their purchasing departments
when they delegated sourcing may have to expand
them in order to handle more relationships. They
may need to supplement or replace people who have
only commercial expertise with people who have
analytical skills and deep knowledge of commodity
markets. And companies that have organized their
purchasing functions around particular commercial
relationships or types of commodities might have to
change their teams’ focus to staying on top of technological, supply-and-demand, and cost trends in
broader commodity sectors like semiconductors, oil
and plastic resins, and metals.
Heat treating
A move to managing select lower-tier vendors constitutes a major change for OEMs that have been
Yamamoru
Screws
focusing predominantly on top-tier suppliers. It can
Mfrs in Japan
take
one to two years to accomplish. In addition to reHinges, screws,
washers
shaping the purchasing function, it involves getting
the buy-in of key internal stakeholders such as the
SMYTH CORP.
TO CONTROL
Leather
product divisions, the chief technology officer,
FOR COST
Leather is expensive
and the chief financial officer. (Since one aim of
and accounts for
a large portion of
the approach is to consolidate commodity purHonda’s total costs.
chases further, product divisions may be asked to
compromise on particular components or materials.) For all these reasons, purchasing will need the
support of the company’s leaders to sell the change.
Since they stand to lose power, top-tier suppliers
naturally will not be happy with the new arrangement and may resist it. So another challenge is mainsupplier That has
a direct contract
taining the peace and persuading them that by enwith honda
abling
the OEM to be more competitive and sell more
HONDA-APPROVED
VENDOR That has
products,
they will profit over the long term, too.
a contract with a
higher-tier supplier
Even though implementing the new multitier
approach isn’t easy, OEMs have no choice but to
SUPPLIER That has
a contract with
embrace
it. In an era when the pressures to continua higher-tier
Supplier
ally drive down costs and stay on top of trends in
TO CONTROL
technology and sustainability are growing more
FOR consumer
appeal
intense by the day, it’s essent…
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