Copyright Jeff Dyer, 2001
U.S. MANUFACTURER
COST STRUCTURE
55%
Percent
of
Sales
8%
3%
Purchased
Goods*
Copyright Jeff Dyer, 2001
Labor
Overhead
* This figure is 15-20 percent for service businesses
Source: Fortune, Feb. 20, 1995, p. 75.
OUTSOURCING IS INCREASING
AUTOMOTIVE
100%
62%
64%
67%
Purchased
Goods as a
% of COGS
0%
1975
1985
1995
COMPUTERS
100%
44%
48%
58%
Purchased
Goods as a
% of Sales
0%
Source: Cusumano 1985; Dyer 1996
Copyright Jeff Dyer, 2001
1985
1990
1995
Copyright Jeff Dyer, 2001
Future Competition: Network Versus Network
GM
S1
S2
Toyota
S3
S4
S5
Future competition pits teams of companies against
teams of companies. The extended enterprise that
best achieves virtual integration will win.
*S=Supplier
Copyright Jeff Dyer, 2001
S6
WORLD CLASS COMPANIES HAVE
A “LEAN” VALUE CHAIN
THE VALUE CHAIN
Supplier
Raw
Tool/
Component/
MRO
Assembly
Material
Equipment Sub-Assbly.
Distributor
of
Supplier
Plant
Supplier
Supplier
Services Supplier
“LEAN” VALUE CHAIN
• Low total systems costs (transaction costs,
logistics, quality, product development)
• Fast to market
• High quality
• New technology/Features
• Responsive to market changes
Copyright Jeff Dyer, 2001
DELIGHTED
CUSTOMER
SOME LEADING COMPANIES IN
DEVELOPING VERTICAL ALLIANCES
•
•
•
•
•
Copyright Jeff Dyer, 2001
Toyota Corporation
Bose Corporation
Bain & Company
American Express
P&G/Wal-Mart
Automaker Profitability
(Average from 1982-1998)
Pretax Return on Assets*
12%
10%
9.6%
8%
6.4%
6%
4.4%
4%
3.2%
2.8%
2%
0%
Toyota
Chrysler
(Source: Annual reports, Daiwa Analysts Guide)
* Pretax automotive income divided by automotive assets.
Copyright Jeff Dyer, 2001
Ford
Nissan
General
Motors
Governance Profile
(Toyota vs. GM and Ford)
Percent of
Total
Component
Costs
Arm’s-length
Suppliers
Arms-length
(Independent)
Suppliers
35%
25%
Partner
Suppliers*
Partner Suppliers+
48%
10%
Internally
Manufactured
Internally
Manufactured
55%
27%
* 2 or less suppliers for a
product category
+ Kankei kaisha
Copyright Jeff Dyer, 2001
General Motors
and Ford
Toyota
Identifying 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
Copyright Jeff Dyer, 2001
Three Key Sources of Inter-organizational
Competitive Advantage
Dedicated
Asset
Investments
Knowledge
-Sharing
Routines
Inter-firm
Trust
Copyright Jeff Dyer, 2001
Copyright Jeff Dyer, 2001
The Value of a Network Increases as
Membership & Knowledge-Sharing Increases
Single Firm
Connections:
Directions:
0
0
3-Firm Network
3
6
6-Firm Network
15
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.
Copyright Jeff Dyer, 2001
900
700
Source: Adapted from M. Lieberman, 1994. “The diffusion of ‘lean manufacturing’ in the Japanese and U.S.
automotive industry.” ‘Revolutionary Change’ Conference, Shizuoka, Japan.
Copyright Jeff Dyer, 2001
19
92
19
90
19
88
19
86
19
84
19
82
19
80
19
78
19
76
19
74
19
70
19
72
Toyota
Assemblers
Suppliers
500
300
100
19
68
Growth in Annual Value-Added per
Employee (Index = 100
Japanese Automotive Labor Productivity (1968-1992)
Suppliers Learn Faster in Toyota’s Network
GM
A1
Toyota
A2
A3
J1
U.S. suppliers improve their performance
at a faster rate after joining Toyota’s
knowledge sharing network.
Copyright Jeff Dyer, 2001
J2
SUPPLIER QUALITY PERFORMANCE OVER TIME
(For Toyota versus the Supplier’s largest U.S. Customer)
1500
Quality (Defects)
1250
1000
(852)
Defects 750 (848)
(parts per million)
(798)
(789)
(603)
(485)
500
(421) U.S. OEM
250
(208)
0
1990
Copyright Jeff Dyer, 2001
1992
1994
1996
Toyota
SUPPLIER COST PERFORMANCE OVER TIME
(For Toyota versus the Supplier’s largest U.S. Customer)
Labor Productivity
400
(326)
300
Sale s pe r
dire ct e mploye e
(in thousands) 200
(331)
Toyota
(304)
(273)
(280)
(301)
(243)
(295)
U.S. OEM
100
0
1990
92
8
Inventories as
a percent
4
of sales
96
Inventory to Sales
(6.6%)
6
94
(6.2%)
(6.2%)
(6.0%)
(6.1%)
(4.7%)
(5.9%) U.S. OEM
(4.3%) Toyota
2
0
1990
Copyright Jeff Dyer, 2001
92
94
96
KNOWLEDGE SHARING IN THE TOYOTA GROUP
Toyota
Supplier
Association
• Meet monthly to
share widely applicable
best practices
(cost, quality, safety,
mgmt.)
Copyright Jeff Dyer, 2001
Consulting Divisions
(On-site Assistance)
Quality
Workshops
Toyota Production
System Workshops
Jishuken Activities
(Supplier Teams)
• Rotate to each supplier’s
plant for 1-2 months
to assist with improvements
(suppliers consult to each
Logistic
Workshops other)
Organization of Toyota’s Supplier Association
Frequency
Divisional
Meeting 1
Once/annum
General Assembly
Twice/annum
Top Management
Meeting
6 Times/annum
Executive Meeting
Divisional
Meeting 2
Divisional
Meeting 3
Frequency: once/month
Agenda: - Information gathering
from Toyota Motor Corp.
- Plans and policies
- Research activities
Copyright Jeff Dyer, 2001
Quality
Costing
Committee Committee
Safety/
General
PR-Sports
Health
Affairs
Committee
Committee
Committee
Frequency: once/month
Agenda: - Information sharing
- Training
- Know-how /best practice sharing
Toyota’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).
Copyright Jeff Dyer, 2001
Toyota Supplier Support Center Project Results
(31 Suppliers)
%
500
PRODUCTIVITY INCREASE
(Output per labor hour)
450
450
400
400
350
313
300
290
300
250
250
200
Percent Change
200
150
124
115
100
75
100
83
60
50
25
70
53
41
97 100
100
75
67
50
32
20
100
68
35
30
52
50
14
0
Supplier:
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 EE
Avg.
0
10
20
40
50
60
50
50 50
55
60
70
80
75
83
100 96
98
96
120
%
(Source: TSSC, November 1997)
Copyright Jeff Dyer, 2001
90
80
85 86
97
75
81
95
80
79
89
INVENTORY REDUCTION
(Inventory as a percent of sales)
75
75
80
93
55
87
83
75
Toyota’s Supplier “Study Teams” (Jishuken)
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.
Copyright Jeff Dyer, 2001
The Value of Supplier
Learning 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
Copyright Jeff Dyer, 2001
Price of Entry: Little Proprietary
Production 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
Copyright Jeff Dyer, 2001
Knowledge 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
Copyright Jeff Dyer, 2001
Barriers to Intra-Plant
Knowledge 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.
Copyright Jeff Dyer, 2001
COLLECTIVE LEARNING IN
TOYOTA’S NETWORK






Leader/Orchestrator of Network-level KnowledgeSharing 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
Copyright Jeff Dyer, 2001
THE CHRYSLER EXTENDED ENTERPRISE
Definition:
A unified group of suppliers and supply tiers who strive
together to maximize the effectiveness of vehicle
development and minimize total system costs in order
to maximize the value passed on to a common ultimate
customer.
Copyright Jeff Dyer, 2001
CHRYSLER’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.
Copyright Jeff Dyer, 2001
SCORE ENABLERS
•
•
•
•
•
Materials substitution
Product substitution
Product standardization
Product redesign
Process redesign
Copyright Jeff Dyer, 2001
• Weight Reduction ($1
per pound)
• Complexity Reduction
($20,000/part
eliminated)
• Optimization of mfg.
location
• New technologies
CHRYSLER’S SCORE RESULTS
$2,500
$2,092
Millions of Dollars
$2,000
$1,500
$1,213
$1,007
$1,000
$500
$762
$504
$269
$0
1993
1994
Source: Chrysler Procurement & Supply
Copyright Jeff Dyer, 2001
1995
1996
1997
1998
Chrysler’s Profit Per Vehicle
(vs. Ford and GM)
2500
Dollar Profit Per Unit
2000
1500
1000
500
0
C F G
C F G
C F G
C F G
C F G
C F G
C F G
1990
1992
1993
1994
1995
1996
C F G
C F G
-500
-1000
1988
Chrysler
(Source: Chilton’s Automotive Industries, April issue, 1988-1998)
Copyright Jeff Dyer, 2001
1997
Ford
1998
GM