view of extended value stream excellence. Part of this process is tran-
sitioning from a focus on price to that of a cost-based reality.
In 2004, aggressive three-year targets were set:
- Single digit ppm quality and flawless launch
- Thirty percent model-to-model cost savings and focus on total
cost - Developing lean processes with core and near core suppliers
- Investment and product coordination with business lines
- Faster design cycle times
- See technology early in products
- Discontinue relationships with marginal suppliers
Moving away from marginal suppliers seems like an obvious thing to
do. However, Delphi buyers were not always encouraged to do this.
To select strategic suppliers, Delphi developed a matrix and sorted
commodities into four cells: core, near core, niche, and commodity. For
core and near core-commodities, Delphi is gradually developing a set of
strategic suppliers who sign a master supply agreement modeled after
Toyota and Honda. This several page agreement lays out principles of
working together (such as recall and warranty responsibility, financial
terms and conditions, R&D responsibility, and long-term commitments to
source from the supplier). It is not a specific contract for specific parts,
but a set of detailed agreements on how each will behave. When the
strategic sourcing agreement is established, purchasing decisions are
almost nonevents. The cost model basically locks the supplier into a price.
Delphi’s director of cost management describes the cost management
concept as “reality improvement.” Unfortunately price-based purchasing
is not based in reality. In many instances market prices were established
and buyers chose an arbitrary target for price downs (e.g., 5 percent
price reductions across the board next year). Toyota’s system is based
on cost-management models that reflect the reality of actual costs, with
target prices based on what customers are willing to pay for automobiles.
Toyota sets a target profit and proceeds to develop the car to meet
the cost targets necessary. Suppliers are given target costs to meet and
must develop their components to meet these targets, building in their
own profits. When Toyota asks for price reductions, it is based on
actual knowledge of true costs, so they know where it’s necessary to
reduce costs and where suppliers are in danger of losing money. Price
is important, but behind price is cost, and behind cost is reality.
Chapter 12. Develop Suppliers and Partners 301