INTEGRATED SUPPLY CHAIN
MANAGEMENT- A CASE STUDY
OF HARLEY DAVIDSON
Shilpa Kamath
Faculty, Institute: MSNM Besant Institute of PG Studies
ISSN – 146
Year February 2008
Volume 2, Issue 1/5
Keywords: Integrated Supply Chain Management, mutual learning, continuous involvement, IT,
bankruptcy.
Abstract: Suppliers form the first link in the supply chain of any organization. Hence utmost care should
be taken in selecting the suppliers and ensuring their quality, cost, delivery and service levels on a regular
basis for deriving value out of supply chain management. This can only happen if suppliers are provided
with necessary inputs in the form of training and continuous involvement.
The supplier’s performance should be reviewed against set goals. Wherever shortcomings are noticed,
counter measures emerging from mutual learning need to be put in place. All this will enable the
organization to work with suppliers as partner so that full benefit of integrated supply chain may be
derived.
The paper briefly explains how integrated supply chain and supplier relationship along with IT helped
Harley Davidson to emerge as a successful company from the bankruptcy position over time.
Introduction:
Suppliers form the
starting point of integrated supply chain
management. Hence their role and
responsibilities in achieving the ultimate
objectives of the supply chain becomes
extremely significant. The organization
should ensure that the suppliers carry the
same understanding of the customer
requirements and accord the same
amount of customer responsiveness to
the organization as organization accords
to its own customers and end users.
The only way supplier can achieve this
is by being as close as possible to
customers. The organizations should
also provide necessary resources and
inputs so that supplier is able to work as
an extended arm of the organization
within the integrated supply chain.
The Harley-Davidson (H-D) motorcycle
brand is undoubtedly an American
cultural icon, along with brands like
Coca-Cola, McDonald's and Marlboro.
H-D's motorcycles had become a symbol
of individuality and the spirit of freedom
and independence, for customers in the
US and in various other parts of the
world. Success had not come easily to
H-D. In the early 1980s, the company
almost went bankrupt on account of
severe competition from Japanese
motorcycle brands such as Honda,
Suzuki and Kawasaki. However, H-D
revived its operations by a rigorous,
comprehensive restructuring of their
supply chain management.
Reason behind Harley- Davidson’s
decision to restructure their supply
Before the
chain management:
turnaround, purchasing did not support
engineering and design at all.
Engineering department was performing
its own design and test work, but was
unsupported by production departments
and other company disciplines. The
small number of engineers who were
there was juggling suppliers, handling
their own logistical needs, and taking
care of routine personnel functions.
These activities not only distracted
engineers from their true function of
designing and testing, but also were
simply beyond their expertise. The
department's capabilities were diluted,
and relationships with suppliers were
sub-par and unsophisticated.
Predictably, the engineers focused on a
supplier's technical innovation and failed
to consider whether the supplier could
produce the necessary volume, deliver
on schedule, or meet cost targets. There
are suppliers out there who are good in
technical innovation, but not in other
requirements. They were low volume
and didn't have a high degree of
competency on the commercial side. Or
they couldn't meet the scheduled
requirements for manufacturing.
Supplier components came in late.
Production was often jeopardized. As
problems increased, suppliers were
chosen without the benefit of a portfolio
analysis. They were brought on board
regardless of their capabilities.
Because of these reasons, the purchase
cost and inventory cost increased
tremendously. The operating expenses
increased from 11% of revenue to 17.7%
from year 1990 to 1993. In the year
1993 the company incurred net loss of
$11885 thousands.
Restructuring
Management:
of
Supply
Chain
In 1993, Harley Davidson adopted
following strategies and restructured
their supply chain management.
•
Integrate purchasing into total
company operations.
Harley-Davidson has a history of
using cross-functional teams outside
the Product Development Centers as
well. Each line of motorcycles is
supported by a team consisting of
representatives
from
design,
manufacturing, purchasing, and
marketing. Occasionally a team may
pull in a styling expert or a finance
person for more sophisticated cost
analysis.
Harley-Davidson's Kansas City,
Missouri, manufacturing plant for
sport motorcycles is a highperformance work organization--an
engineering
management
environment run by self-managed
work teams with no supervisory
level. In such an environment,
effortless availability of resources
and involvement by suppliers leads
to
high
performance.
To obtain this effortless availability,
the four primary process work
groups--fabrication, paint, engine
assembly, and power train assembly-are backed up by a resource group.
The resource group, purchasing
staffs that are technical experts,
supply the process work group with
materials, personnel, and whatever
else
the
group
needs.
Leaders in the resource groups are
accountable to the Kansas City
plant's general manager but actually
report to Harley-Davidson corporate
headquarters in Milwaukee. This
reporting relationship is designed to
align the Kansas City plant's
procurement strategies with overall
corporate strategies. One such
corporate strategy is to establish
common suppliers for materials used
in all Harley-Davidson facilities.
•
Develop
purchasing
professionals into knowledge
specialists.
The purchasing department contains
two groups: operational purchasing,
which supports day-to-day needs,
and development purchasing, which
works on new-product design and
development. This latter group,
which works in the Product
Development Center, understands
the product strategy for the company
and determines if the current supplier
base has the capabilities needed for
the projected new products or if a
new supplier is needed. In their role
as purchasing engineers, members of
this group work side-by-side with
engineering staff early in the newproduct-design process.
The purchasing engineers bring to
the Product Development Center
their knowledge of sourcing,
availability of alternative materials,
and awareness of new technology.
They consider manufacturability
using particular materials and the
security of worldwide sources of
supply. Creating the purchasing
engineers has helped HarleyDavidson bring new products to
market sooner.
In the other purchasing group,
operational purchasing, HarleyDavidson created the position of
buyer/planner, combining the roles
of buyer and inventory planner. This
combination gives the same person
responsibility
for
production
planning and for purchasing a
specific group of items. The
buyer/planners are responsible for
forecasting,
inventory
levels,
purchasing, and asset management
for their own line of parts and
accessories for the motorcycles. This
arrangement gives the person who
holds the job a broad authority over a
narrow group of supplies. The
benefit for the company came in
reduced lead times for supplies and
lower
inventory
levels.
Because of the combined function,
the buyer/planners need extended
skill sets that include analytical
reasoning, forecasting, negotiating,
and
communications.
HarleyDavidson requires people aspiring to
the buyer/planner position to get two
certifications:
certification
in
production
and
inventory
management (CPIM) from the
American Production & Inventory
Control Society (APICS) and
certified
purchasing
manager
(C.P.M.)
from
the
National
Association
of
Purchasing
Management
(NAPM).
These
certifications require extended study
and examinations.
However, the two certification
processes did not cover all of the 28
separate skills that the leadership in
supply management identified for
this position. The company gave
individuals three years to fully train
for the position, and within that time
frame
the
individuals
were
responsible for developing a training
plan and schedule. Harley-Davidson
assigned each person a mentor who
had obtained certification and who
could give individual coaching on
preparing for the certification exam
and applying the knowledge. As an
incentive for people to go through
this training, the salary grade for the
buyer/planner was set at one grade
above the buyer position.
•
Reap the benefits
procurement.
of
e-
Harley-Davidson's
Internet-based
supply chain management strategy is
called SiL'K, which stands for
Supply Information Link. Using the
SiL'K portal, employees access
supplier catalogs and process orders
at their workstations. The system
also fosters greater interaction with
suppliers, including collaborative
scheduling and demand planning.
Suppliers using the portal see
Harley-Davidson's picture of the
retail demand for motorcycles and
Harley-Davidson's schedule, thus
giving suppliers information to
determine their ability to meet
deadlines. Available information also
includes Harley-Davidson's quality
expectations
and
delivery
requirements. Suppliers can also
conduct financial transactions online,
thus reducing invoicing time.
•
Supplier involvement-
On-site suppliers play a key role at
Harley-Davidson, taking part in new
product
design meetings and
helping engineering teams find
quality and cut costs. This supplier
residency program's goal is to have
50 full-time seats filled, with 80 parttime residences. Harley-Davidson's
Supplier
Advisory
Council,
meanwhile, seeks out issues of
strategic importance at HarleyDavidson. There are now 16 supplier
delegates who serve on a four-year
rotation on the council.
•
Supplier relationships.
Harley-Davidson has cut its supply
base in half since 1990, an effort that
consciously eliminated the suppliers
who were not up to meeting the new
objectives of cost, quality and
timing. Harley-Davidson now sports
a win-win philosophy with its
remaining suppliers. Its goal is to
help a small group of suppliers
prosper, and help Harley-Davidson
prosper. The company is now on
track to move from in excess of
3,000 MRO supplier relationships to
a concentrated 80% to 90% buy with
three suppliers. In the area of
supplier relationships regarding
original
equipment
purchases,
Harley-Davidson now concentrates
80% of its purchase with a critical
group of suppliers who willingly
take part in Harley-Davidson
supplier strategies.
•
Cost
Suppliers are expected to achieve
real-time improvement in their costs.
This initiative asks suppliers to think
more strategically around cost and
show how they are able to bring
innovation through technology. They
are expected to hit the targets
established by Harley-Davidson.
•
Quality
Under the Harley-Davidson mantra,
suppliers are expected to meet "twice
the level of quality." They are asked
to develop a strategic plan for how
they will achieve this. They are
expected to take a larger view of
their quality processes and make
strides in quality improvement. This
plan is written down and provided to
Harley-Davidson along with an
outline of who is responsible for
bringing it to fruition.
•
Timing
The suppliers are expected to take
"half the time" to develop and
deliver new products. They are
expected to develop tools for faster
development and come up with plans
that are more supportive to HarleyDavidson's design and development
efforts.
To underscore all of this, HarleyDavidson supplies a master supplier
agreement that is shared with all
suppliers. It is jointly developed by a
Supplier Advisory Council and
Harley-Davidson. This clarifies the
roles and responsibilities that HarleyDavidson and its suppliers share.
Suppliers are now graded on a partsper-million basis. Harley-Davidson
has a target of 48 parts per million on
quality that they are expected to
achieve. The company sends the
suppliers a monthly report showing
how they are performing when it
comes to quality and delivery
performance.
If a supplier receives a bad report
card, Harley-Davidson takes action.
If the supplier is not doing well,
Harley- Davidson sends resources to
help them. If the supplier shows a
pattern where they are not
improving, they are placed on
conditional status and given a period
of time in which to show
improvement. This time period can
be anywhere from three to six
months. If they make improvements
during this time, they can either be
placed on extended conditional status
or unacceptable status. If they are
placed on unacceptable status,
Harley-Davidson searches for a new
supplier.
Three Important Element
Supply Chain Strategy:
of
The three key elements of this supply
chain management strategy are:
- Cycle-time management
- Relationship management.
- Sustainability.
1. Cycle –Time Management:
Through the emphasis on cycle time,
Harley-Davidson hopes the SiL'K
strategy will improve and shorten the
company's own procurement cycle.
The system should help HarleyDavidson modify its content
management. Employees will use the
portal to access supplier catalogs,
extract
information
about
components and process orders.
They can use it to access trading
exchanges and other open online
markets. This should make the
company's entire buying system
more efficient, reducing cycle time
of enterprise wide self-service
requisitions, self-service workflow
and approvals, online cataloging and
electronic documentation generation
from transactions. By shortening
procurement cycle times, it reduces
the amount of inventory in the plant.
By cutting down on time spent on
non-value areas, workers can instead
spend time to spot quality defects in
supplies. Thus notice quality defects
from the supplier with a shorter lead
time.
terms of what's being consumed and
replenished at the retail level, and
plan with the distribution center.
3. Sustainability:
The emphasis on sustainability will
make sure the system can be easily
upgraded as software improvements
or technology changes come along.
This means the SiL'K system should
be around for a long time. The
enterprise wide tool can be easily
updated, is user friendly, and will
enable Harley- Davidson to put this
in and live for a long time.
Results:
•
Cost
reductionPurchasing
Magazine estimates that HarleyDavidson reduced costs of
purchased goods and services
about $37 million from 1996
through now. Based on its old
model of managing inflation (by
allowing annual increases of
1.5%-2%) costs would have risen
close to $40 million.
•
Inventory
strategy-HarleyDavidson handles its inventory
on a just-in-time schedule. The
company now runs on six and a
half days' to 10 days' worth of
inventory.
This
is
an
improvement over 1995, when
the company ran on eight to 15
days' worth of inventory.
•
Quality improvement-Roughly
60%
of
Harley-Davidson's
supply base is now performing at
48 ppm defect levels or better.
2. Relationship Management:
It hopes to use the Internet to share
information with suppliers and
further enhance relationships with
them. Suppliers will have access to
Harley-Davidson's
quality
expectations, delivery requirements
and other important data.
Harley-Davidson has created an
electronic supplier portal--possibly
through an extranet--that would link
suppliers to the company. This
would give suppliers access to
centralized transaction data. The
window will help suppliers see what
their current level of performance is
and allow for collaborative planning
and scheduling. Suppliers will see in
•
Harley Davidson has achieved a
compound annual growth rate of
22% in revenue over the past five
years.
•
Output of motorcycles increased
17.5 percent in one year and
earnings grew faster than
revenue.
•
Order fill rates improved in four
years from 85 percent to 99.6
percent.
•
Other
product
development
centers were opened in following
years
as
the
company
experienced double-digit growth
every quarter.
21st century, H-D was the only
American motorcycle brand in the
US, while the market was flooded
with imported motorcycle brands
from companies such as BMW,
Honda, Kawasaki, Yamaha and
Suzuki. Despite being dominated by
imported models, which were
technologically well advanced and
more sleek and stylish, H-D
remained the market leader in the US
motorcycle market...
Reference:
1. Sahay.B.S. , Supply
Chain Management in the
twenty- first century,
2000, Macmillan India
Limited.
2. Shah H.K. , Supplier role
in Integrated Supply
Chain
Management,
2000.
Conclusion:
Such performance from a company
which was at the brink of bankruptcy
in early 1980s was viewed as one of
the best examples of corporate
turnarounds in the world. The
continuous involvement with the
supplier at all stages from product
design to the actual delivery of parts
and after sales services helped
Harley
Davidson
to
achieve
customer satisfaction.In the early
Websites:
•
•
•
•
www.harley-davidson.com.
www.icmrindia.org.
www.globalbestpractices.com
www.purchasing.com