copyright jeff dyer, 2001. u.s. manufacturer cost structure * this figure is 15-20 percent for...

Copyright Jeff Dyer, 2001


U.S. MANUFACTURER U.S. MANUFACTURER COST STRUCTURECOST STRUCTURE

55%

8%3%

Percentof

Sales

PurchasedGoods*

Labor Overhead

* This figure is 15-20 percent for service businessesSource: Fortune, Feb. 20, 1995, p. 75.


OUTSOURCING IS INCREASINGOUTSOURCING IS INCREASING

62% 64% 67%

0%

100%

1975 1985 1995

Source: Cusumano 1985; Dyer 1996

44% 48% 58%

0%

100%

1985 1990 1995

AUTOMOTIVE

COMPUTERS

Purchased Goods as a% of COGS

Purchased Goods as a% of Sales


Future Competition: Network Versus NetworkFuture Competition: Network Versus Network

GM

S1 S2 S3

Toyota

S4 S5 S6

Future competition pits teams of companies against teams of companies. The extended enterpriseextended enterprise that best achieves virtual integrationvirtual integration will win.

*S=Supplier


WORLD CLASS COMPANIES HAVE WORLD CLASS COMPANIES HAVE A “LEAN” VALUE CHAINA “LEAN” VALUE CHAIN

RawMaterialSupplier

MROSupplier

Tool/Equipment

Supplier

AssemblyPlant

DistributorComponent/Sub-Assbly.

Supplier

Supplierof

Services

DELIGHTEDCUSTOMER

THE VALUE CHAIN

• Low total systems costs (transaction costs, logistics, quality, product development)• Fast to market• High quality• New technology/Features• Responsive to market changes

“LEAN” VALUE CHAIN


SOME LEADING COMPANIES IN SOME LEADING COMPANIES IN DEVELOPING VERTICAL ALLIANCESDEVELOPING VERTICAL ALLIANCES

• Toyota Corporation

• Bose Corporation

• Bain & Company

• American Express

• P&G/Wal-Mart


Automaker ProfitabilityAutomaker Profitability(Average from 1982-1998)(Average from 1982-1998)

9.6%

6.4%

4.4%

2.8%3.2%

0%

2%

4%

6%

8%

10%

12%

Toyota Chrysler Ford Nissan GeneralMotors

Pre

tax

Ret

urn

on A

sset

s*

(Source: Annual reports, Daiwa Analysts Guide)* Pretax automotive income divided by automotive assets.


Governance ProfileGovernance Profile((Toyota vs. GM and FordToyota vs. GM and Ford))

Percent of Total

Component Costs

Arm’s-length Suppliers

35%

Partner Suppliers*

10%

Internally Manufactured

55%

Arms-length (Independent)

Suppliers

25%

Partner Suppliers+

48%

Internally Manufactured

27%

* 2 or less suppliers for a product category

+ Kankei kaisha

General Motors

and FordToyota


Identifying Strategic PartnersIdentifying Strategic Partners

• High value inputs/services; suppliers with ability to influence your costs.

• Inputs that can differentiate your product• Inputs that demand coordination to

achieve desired fit/quality/performance• Inputs with “interaction effects” with other

inputs; influence quality & speed to mkt.• Inputs that may be scarce


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

Dedicated Asset

Investments

Knowledge-Sharing Routines

Inter-firm Trust


The Value of a Network Increases as Membership & Knowledge-Sharing Increases

Connections: 0 3 15Directions: 0 6 30

As the number of nodes in a network increases arithmetically, the value of the network increases exponentially (n2 growth). Small improvement efforts that ripple through the network can dramatically increase the value for all members.

Single Firm 3-Firm Network 6-Firm Network


Japanese Automotive Labor Productivity (1968-1992)

100

300

500

700

900ToyotaAssemblersSuppliers

Gro

wth

in A

nnua

l Val

ue-A

dded

per

E

mpl

oyee

(In

dex

= 1

00

Source: Adapted from M. Lieberman, 1994. “The diffusion of ‘lean manufacturing’ in the Japanese and U.S. automotive industry.” ‘Revolutionary Change’ Conference, Shizuoka, Japan.

U.S. Automotive Labor Productivity (1968-1992)

0

50

100

150

200

250

300

AssemblersSuppliers

Gro

wth

in A

nnua

l Val

ue-A

dded

per

E

mpl

oyee

(In

dex

= 1

00)


Suppliers Learn Faster in Toyota’s NetworkSuppliers Learn Faster in Toyota’s Network

A1 A2 J1 J2A3

GM Toyota

U.S. suppliers improve their performance at a faster rate after joining Toyota’s knowledge sharing network.


Quality (Defects)

(208)

(848)(789) (603)

(421) U.S. OEM

(798)(852)

(485)

0

250

500

750

1000

1250

1500

1990 1992 1994 1996

Defects (parts per million)

Toyota

SUPPLIER QUALITY PERFORMANCE OVER TIMESUPPLIER QUALITY PERFORMANCE OVER TIME(For Toyota versus the Supplier’s largest U.S. Customer)(For Toyota versus the Supplier’s largest U.S. Customer)


Labor Productivity(331)

(280)

(326)

(243)

(304)(273)

(301) (295)

0

100

200

300

400

1990 92 94 96

Sale s per direct employee

(in thousands)

Toyota

U.S. OEM

Inventory to Sales(6.6%)

(4.7%)(6.1%)

(4.3%)

(5.9%)(6.0%)

(6.2%)(6.2%)

0

2

4

6

8

1990 92 94 96

Inventories asa percentof sales

Toyota

U.S. OEM

SUPPLIER COST PERFORMANCE OVER TIMESUPPLIER COST PERFORMANCE OVER TIME(For Toyota versus the Supplier’s largest U.S. Customer)(For Toyota versus the Supplier’s largest U.S. Customer)


KNOWLEDGE SHARING IN THE TOYOTA GROUPKNOWLEDGE SHARING IN THE TOYOTA GROUP

SupplierAssociation

Toyota

Consulting Divisions(On-site Assistance)

Jishuken Activities (Supplier Teams)

• Meet monthly to share widely applicable best practices (cost, quality, safety, mgmt.)

Quality Workshops

Toyota ProductionSystem Workshops

LogisticWorkshops

• Rotate to each supplier’s plant for 1-2 months to assist with improvements (suppliers consult to each other)


Organization of Toyota’s Supplier AssociationOrganization of Toyota’s Supplier Association

General Assembly

Top Management Meeting

Executive Meeting

Frequency: once/monthAgenda: - Information gathering from Toyota Motor Corp. - Plans and policies - Research activities

DivisionalMeeting 1

DivisionalMeeting 2

DivisionalMeeting 3

QualityCommittee

CostingCommittee

Safety/Health

Committee

PR-SportsCommittee

GeneralAffairs

Committee

Frequency: once/monthAgenda: - Information sharing - Training - Know-how /best practice sharing

Frequency

Once/annum

Twice/annum

6 Times/annum


Toyota’s Consulting DivisionsToyota’s Consulting Divisions

• Toyota’s Operations Management Consulting Division (OMCD) in Japan has 55-60 consultants. These are the “gurus” of the Toyota Production System.

• On average, suppliers receive 12 days of visits per year.

• Toyota has replicated the concept in the U.S. with its Toyota Supplier Support Center (TSSC).

• TSSC has 20 consultants and has achieved impressive results, having achieved an average of 124 percent labor productivity improvement and 75 percent inventory reductions (see next slide).


Toyota Supplier Support Center Project ResultsToyota Supplier Support Center Project Results(31 Suppliers)(31 Suppliers)

PRODUCTIVITY INCREASE(Output per labor hour)

300

25 20

9768

450

41

290

100

35

400

250

7050 52

115

5332

100

14

75

313

10075

506083

67

30

100

200

124

0

50

100

150

200

250

300

350

400

450

500

%

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z AA BB CC DD EESupplier:

9690

50 50

10

98

75

95

79 80

60

8581

75

8783 86 89 93

83

96 97

75

5055

70

80 80

50

75 75

55

0

20

40

60

80

100

120 INVENTORY REDUCTION(Inventory as a percent of sales)

%

Avg.

(Source: TSSC, November 1997)

Per

cent

Cha

nge


Toyota’s Supplier “Study Teams” (Toyota’s Supplier “Study Teams” (JishukenJishuken) )

Toyota

• Each group consists of 6-12 suppliers. Direct competitors are not in the same group. Group composition changes every 3 years to keep groups “fresh.”

• Each group meets with Toyota (OMCD) to decide the theme for the year.

• The group visits each supplier’s plant over a 4-month period, examining the processes and offering suggestions for improvement.

• Toyota organizes an annual meeting where each group presents the key learnings from the year's activities.


The Value of Supplier The Value of Supplier Learning TeamsLearning Teams

“ We get blinded just like everyone else. When you bring a whole new set of eyes into your plant you learn a lot. We’ve made quite a few improvements. In fact, after the (PDA) core group visits to our plant, we made more than 70 changes to the manufacturing cell.”

- U.S. Supplier Plant Manager


Price of Entry: Little Proprietary Price of Entry: Little Proprietary Production KnowledgeProduction Knowledge

“That’s one of our requirements because if we take the time and effort to transfer the know-how, we need to be able to use the suppliers’ operations as a vehicle to help other suppliers.” -Lesa Nichols, TSSC consultant

“They gave us a gift [TPS]; how can we not open our plant and share what we’ve learned with other Toyota suppliers.”-U.S. supplier plant manager


Knowledge Appropriation RulesKnowledge Appropriation Rules

“The fact that through BAMA we have made process improvements that saved us money and Toyota did not go after those savings speaks volumes.”- U.S. supplier plant manager

“We don’t want to have a PICOS team poking around our plant. They will just find the “low hanging fruit”--the stuff that’s relatively easy to see and fix. We all have things in our plants that we know need to be fixed. They’ll just come in, see it, and ask for a price decrease. We’d prefer to find it ourselves and keep the savings.”

- U.S. supplier plant manager


Barriers to Intra-Plant Barriers to Intra-Plant Knowledge TransfersKnowledge Transfers

• Network (Customer) Constraints– Customer policies or practices may prevent

implementing new processes. Knowledge transfers often require customer approval and significant downtime to reconfigure the mfg. operations.

• Internal Process Rigidities– Physical plant constraints; processes involve large

capital investments in heavy equipment/machines (e.g., stamping, injection molding) which are bolted to floor, set into concrete, hardwired to utilities, trenching in floor. Cost (and time) to rearrange is high.


COLLECTIVE LEARNING IN COLLECTIVE LEARNING IN TOYOTA’S NETWORKTOYOTA’S NETWORK

Leader/Orchestrator of Network-level Knowledge-Sharing Processes

Organizational Unit that Acquires, Stores, and Diffuses Network Knowledge

Strong Norms of Reciprocity Optimal Size Learning Groups for Sharing for

Sharing both Explicit & Tacit Knowledge Geographic Proximity and Location-Specific

Learning Incentives/Rewards for Contributors of

Knowledge


THE CHRYSLER EXTENDED ENTERPRISETHE CHRYSLER EXTENDED ENTERPRISE

Definition:

A unified group of suppliers and supply tiers who strive together to maximize the effectiveness of vehicledevelopment and minimize total system costs in order to maximize the value passed on to a common ultimatecustomer.


CHRYSLER’S SCORE PROGRAMCHRYSLER’S SCORE PROGRAM

• Supplier COst Reduction Effort (SCORE) program designed to create incentives and rewards for supplier initiatives that benefit Chrysler’s Extended Enterprise

• Suppliers maintain or improve margins. Supplier shares at least 50 percent of value with Chrysler. Chrysler does not audit.

• Chrysler gives SCORE targets/objectives and carefully tracks results

• Chrysler recognizes and rewards top SCORE performers.


SCORE ENABLERSSCORE ENABLERS

• Materials substitution• Product substitution• Product standardization• Product redesign• Process redesign

• Weight Reduction ($1 per pound)

• Complexity Reduction ($20,000/part eliminated)

• Optimization of mfg. location

• New technologies


CHRYSLER’S SCORE RESULTSCHRYSLER’S SCORE RESULTS

$1,213

$2,092

$269

$504

$762

$0

$500

$1,000

$1,500

$2,000

$2,500

1993 1994 1995 1996 1997 1998

Mill

ions

of

Dol

lars

Source: Chrysler Procurement & Supply

$1,007


Chrysler’s Profit Per VehicleChrysler’s Profit Per Vehicle(vs. Ford and GM)(vs. Ford and GM)

-1000

-500

0

500

1000

1500

2000

2500

C F G C F G C F G C F G C F G C F G C F G C F G C F G

Do

llar

Pro

fit

Per

Un

it

Chrysler Ford GM

1988 19961990 1992 19941993 1995 1997 1998

(Source: Chilton’s Automotive Industries, April issue, 1988-1998)

copyright jeff dyer, 2001. u.s. manufacturer cost structure * this figure is 15-20 percent for...

Documents

copyright jeff dyer

supplier slide

firm network slide

sales slide

scarce slide

network increases

ford toyota slide

network future competition