Traditional vs. Lean Models of Supplier Management
There are many pressures on companies in the hypercompetitive global economy:
pressures for cost reduction, unprecedented quality levels, and responsiveness
to niche market demands, and all of these at hyperspeed. If a company has become
big and bureaucratic and finds it difficult to adapt, it’s appealing to push these
requirements for change onto suppliers. This may mean using some of the new
technologies for reverse online auctions or chasing parts in low-wage countries.
But these short-term solutions create their own sets of problems. The supply
chain infrastructure is not getting leaner and better, and in fact gets weaker.
Using brute force will only work for so long before your company is paying in
warranty claims and lost market share for low-quality products.
Figure 12-2 illustrates the traditional underlying model these companies fol-
low in their relationships with “vendors.” The philosophy is to seek low piece
price. The assumption is that vendors are vendors, and without pressure they will
seek to drive up price and drive down service. The job of purchasing agents is
to counter this by being “tough” on the vendors and squeezing them on price.
Mechanisms like reverse-on-line auctions are powerful price pressure methods.
The supplier can directly see the competition, and in the desire to “win” continues
to underbid not only the competition, but sometimes even his own costs. Delphi
refers to buyers under this model as “hunters and gatherers” (see case study).
They lack any significant professional understanding of the suppliers and go
out with a big club to hunt up and bring home the spoils.
When suppliers are forced into low-balling the bids, they have to find ways
to make money. One way is to charge for engineering changes or any special
service required. Or suppliers may minimize investment in the product and
process. Purchasing must try to counter this through measurement of the sup-
plier and using the numbers to beat up the supplier. The threat is always there
to pull the product and resource it to a lower-cost competitor, perhaps in a lower-
wage country. The result of sourcing on price is short-term cost reduction, but
there are many unintended negative effects, like parts shortages, quality prob-
lems, high warranty costs, and little investment in product innovation, which in
the long term add up to higher total cost.
Toyota is not striving to be the low-price automaker. The goal is to produce
cars at a fair market price that the customer would think has value. Why is this
distinction so important? This philosophy suggests that cost reduction efforts
should not be a one-way train toward the lowest possible cost. Toyota sets tar-
get costs, not just prices. Target costs means the suppliers must operate at cost
levels that allow them to make a profit at the prices the customer pays for parts.
The lean supply chain model is illustrated in Figure 12-3.