Discussion Document
Driving the Next Generation
Purchasing Model
Morristown, New Jersey
October 12th, 2006
Executives are looking for the next generation sourcing model
 Companies are not satisfied with the performance of their supply base and with the
relationships that they have with their key suppliers
 This is supported by our recent interviews with CPOs of major companies across the globe
– The role of the purchasing function will become more strategic (make vs. buy, large
strategic partners, innovation etc.)
– Developing relationships with strategic suppliers is key
– The necessary capabilities are not in place
– The performance is not where it needs to be of key suppliers and how the OEMs /
customers manage them
 Quotes from interviews
–
“Need to better leverage suppliers for innovation“, “Increased collaboration in Development“,
“Increased need to cooperate, work together in R&D; need to be able to commit to suppliers”
– “Have the right intentions or the same goals on both sides”, “Clear strategic intent in regards
to dependencies from both sides”, “Have skilled people to manage the relationship”, “Have a
clear approach for how to manage a relationship“
1
Many suppliers mention Toyota and Honda’s cost-based approach
as a superior and fundamentally different method of sourcing
 Better understanding of supplier needs and economics
– “Toyota uses its cost tables to make sure the suppliers don’t hide margin or exploit design changes”
– “Toyota focuses on processes not piece price…their cost models are built on processes that actually
drive costs such as the number of stamping press hits”
– “Honda cost estimators can tell you your own cost to within 1% accuracy”
 More enduring relationships with fewer suppliers
– “Toyota is very close to a partnership … they want the supplier to be successful”
– “Toyota expects suppliers to make money”
– “Suppliers are willing to go to extraordinary lengths to maintain that trust”
 More design and program stability—set realistic program volume, price and cost targets
before establishing specifications and costs for suppliers
– “Big 3 make 8 to 10 design changes for each program; Toyota makes maybe 3”
– “Toyota always meets or exceeds its volume commitments”
 More reuse—components, architectures, platforms and technologies
– “Toyota is creative about reuse, it knows when to customize, how much to customize and most
importantly when not to customize (develop new design)”
– “Honda leverages re-use to an extreme”
 Results in higher value—better speed, quality, and cost
– “Toyota may even pay the same, but they get better value and reliability”
– “The potential cost reductions with their approach are huge”
2
Toyota and Honda’s model is advantaged across multiple
dimensions
 The benefits of Toyota’s model go beyond cost
– Toyota consistently outperforms the Big 3 on JD Power’s quality metrics—20-30% fewer problems per
hundred
– Brand position is based on advantaged QRD
– In the mass market a strong brand results in superior purchase consideration
– Focuses on value to customers – functionality and quality
– …and typically realizes higher prices for comparable vehicles
– Higher retained value and lower operating costs more than account for Toyota’s price premium
 Dealer interviews qualitatively confirm Toyota’s price premium
– “Although Big 3 MSRPs may be higher, after incentives, owners pay significantly less for vehicles in the
same segment”
– “Buyers are willing to pay more for the Toyota brand across all segments”
– “Across the board, Toyota is simply regarded as a better vehicle: better initial quality, less service visits,
more longevity, better fuel economy in most categories”
– “On average Toyota customers are better educated and earn more. They realize that over the long run,
more money spent at the POS will be paid back in the realms of consumer confidence, reliability, and
efficiency, not to mention the economics of a vehicle more in-demand come trade-in time”
 Toyota has a significant cost advantage over the Big 3 in supplier costs in life cycle costs and
in engineering
3
Two different philosophies have been used to manage suppliers –
price based and cost / performance based sourcing
Supply Base Philosophies
Price Based
Cost/Performance Based
Tries to exploit the supply base as a
market
Price based
Looking for ways to get leverage on
suppliers to improve their negotiating
position
Attempt to gain incremental improvement
by switching suppliers
Arm’s length relationship
Quickly switch suppliers for slightly lower
price
Constantly market test pricing / quality
Low trust between OEM and supplier
Combative
Uses the supply base network as a key
competitive advantage
Constant continuous improvement to
eliminate waste in the entire supply chain
Integrated relationships
Cooperative / knowledge sharing
Sets and meets targeted / required cost
with supply partners
Cost based
Ensures supplier is at an advantage over
market
Encourages and promotes competition for
technology, quality and cost through dual
sourcing in the category
HONDA
4
The new purchasing operating model is based on three key pillars
New Purchasing Operating Model
 Strategic long-term partnership suppliers – strategic suppliers are a critical part of the extended
enterprise and the customer’s success is interdependent on the suppliers success
 Cost-based (not priced based) collaboration across supply chain to eliminate waste
 “Get it right the first time” – Collaboration with suppliers on product design to jointly reduce
waste and promote efficiencies & innovation
 Focus on continuous improvement in pursuit of ideal performance
Commitment to People
Development
 Respect to all people
 Shift perspective/culture to
support new operating model
Commitment to understanding
ideal performance and
eliminate waste
 Ideal cost
 Set incentives to encourage
appropriate behavior
 To mutually agree as to what
is ideal performance
 Zero defects
 On-time delivery everytime
 Train people to see what is
possible
Commitment to Suppliers &
Expectations from Suppliers
 Valuing innovation
 Awareness that ideal is not a
standard, but a moving target
based on physical realities
 To mutually develop path to
ideal performance
 To drive continuous
improvement based on
physical realities
 Build trust and long-term
relationship with suppliers
focused on performance
5
The ideal performance based model creates the “right” supplier
behaviors and a continuous learning cycle from product to product
Aligned Behaviors
A Learning Cycle From
Program to Program
 Establishes cost standards for major processes based on
physical realities (e.g., injection molding cycle times) and
for all elements of a component or system
Supplier
Quote
 Defines an ideal performance / cost to compare with the
supplier cost
Ideal
Performance
 Creates a dialog around cost improvement ideas based on
the supplier quote versus an ideal performance view
Agreed-to
Cost
Model
Update
Cost
Standards
 Drives to an agreement of real ideas that are developed
into a full improvement plan
 Updates cost standards based on reality changes and best
costs
 Uses sourcing as an opportunity to learn
– Understand costs in relation to realities (machines,
people, processes, logistics, etc.)
Supplier
Improvement
Program
– Improve standards toward global best / ideal
performance
 Learnings carried over to the next program – learning
cycle
6
Cost standards are integral to the approach and are a powerful way
of managing supplier target costs, year on year improvements and
engineering changes
EXAMPLE COST ARCHITECTURE
SG&A / Base Tooling
Markups Tooling Mods
Structure
Processes
Structure
Materials
– The standards add up to the total cost / price
much like a BOM
– This explicitly separates SG&A, markup and
tooling
Markup and
Tooling
Costs
Conversion
Costs
Assembly
Structure
Assembly
 There is a cost standard for each element in the
pyramid
Total
Purchased
Part Cost
System
Comp
Processes
Cost Standards
– Process and material based cost models
– Price tables
Injection
Molding
Processes
– Parametric feature based formulae
Input
Costs
Injection
Molding
Materials
 The inputs for each standard come from a
combination of cost models / understanding,
industry accepted costs / prices and observed
prices. There are a number of different ways to
develop a cost standard.
 The standard for an input to the purchased
product should be the same for any end product in
which that input is used – for example, stampings,
injection molding tooling, etc.
7
Cost standards are built up from the physical “reality” of what is
possible
Cost Model:
Cost Model Type:
Model Revision Level:
Part Information
Required Input
Cost Standards are built from:
Calculated Value
Red Text Looked Up Value
Part Information
Part Number:
Part Description:
Revision Level:
Supplier:
Supplier Mfg. Location:
Program Life:
Delphi Plant Location:
Payment Terms:
Units (Metric/English):
Required Capacity:
Year 1 Volume:
Year 2 Volume:
Year 3 Volume:
Year 4 Volume:
Lifetime Volume:
A
Raw Material Cost
Material
Description
UOM
Part Unit
or Mass
Unit Of M eas ure
a
Supplier cost breakdown sheets
B
Unreclaim. Reclaim.
Scrap Unit Scrap Unit
or Mass
or Mass
Material Costs
Unreclaim. Reclaim.
Scrap
Scrap
Cost
Cost/UOM
Price/
UOM
Part
Cost
d
a xd
b xd
Total Matl.
Cost/Unit
Comments/Information
Component 1
Optimum mat'l to meet spec
-
-
-
Component 3
Optimum mat'l to meet spec
-
-
-
c
e
Subtotal A:
Labor Cost
Operation Description
Comments/Info
-
# of People
Per Operation
C
Loaded Labor
Cost/Hr
Part
Cycle Time (Hr)
Total Direct
Labor Cost/Part ($)
a
b
c
a xb xc
Labor Costs
Labor Classification
Optimum labor/machine mix
-
Subtotal C:
Machines/Buildings/Facilities/Tooling Cost
Comments/Information
Optimum for part size/volume
Optimum for part size/volume
Industry data
-
Optimum labor/machine mix
Operation Description
Supplier discussions
[(a + b ) x d] + (c x e )
Component Part Description
b
D
MBF
Cost/
Hr
Machine Size & Type
Part
Cycle
Time (Hr)
MBF
Cost/
Part
Tooling Type
Capital Costs
a
b
c
-
Total
Tooling
Cost
Lifetime
Part
Volume
Tooling
Cost/
Part
Total
MBFT
Cost
d
e
f=d/e
c +f
-
-
-
-
-
Subtotal D:
-
Benchmarks
Competitive analysis
Markups/Design Engineering Cost
Sales, General, and Administrative
Sales, General, and Administrative
SG&A (%)
Design Engineering
Overhead Costs
Total Design/
Development Hrs
Design/Development Type
Total SG&A/
Part ($)
Comments/Information
Commensurate w/global best industry levels, but also consider level of service provided
Comments/Information
Commensurate w/design service level
a
Design/Development
Cost/Hr
Lifetime
Volume
Total Design Eng./
Part ($)
b
c
(a x b) / c
-
Subtotal E1:
Profit
Profit
Profit (%)
The cost standards are continuously updated
based on new levels of performance
Profits
Comments/Information
Commensurate w/global best industry levels, but more is acceptable if competitive overall
Subtotal E:
-
Total Profit/
Part ($)
Cost standards are consistent in approach and
format, and use common cost data
8
One way to build ideal costs is from process based cost standards
that capture best-in-class costs and help estimate component cost
9
Knowledge is captured on an on-going basis across the global
organization to provide deep insight into material costs and
conversion costs ...
Example: Material Cost Targets
Example: Process Cost Targets
Cost Target
Cost Target
Unit
10mm lamination
Piece
5mm lamination
Piece
3mm lamination
Piece
non lamination
Piece
Description
Roll Width
mm
Vinyl 315 Expanded
w/knit
w/non woven
1000
3mm Lamination
1500
2mm Lamination
1500
non Lamination
1500
Cutting Duon
Piece
4.1oz
2.7oz
1500
1500
Cutting Vinyl
Piece
3mm Lamination
1500
Cutting Carpet
Piece
non Lamination
1500
Cutting Pad
Piece
New Low Cost Fab
non Lamination
1500
Sew Listing pocket
Hampton
2mm Lamination
1500
Sewing Fabric
(thread included)
Hannah
Duon
Tyler
non Lamination
Cost
(/m2)
Description
Material
Process
Cutting Fabric
1500
Example: Material Yield Ratio Targets
Component
FSB
Cost
Target Yield %
Sewing Leather
(thread included)
94.00%
FSC
97.00%
RSB (split)
94.00%
RSB (bench)
94.00%
RSC (split)
97.00%
RSC (bench)
97.00%
Pour in Place
90.00%
Headrest
94.00%
Armrest
97.00%
Fabric Utilization
M
Join Sew
M
Top Sew
M
W/P Sew
M
Tack Down
M
Join Sew
M
Top Sew
M
W/P Sew
M
Tack Down
M
%
10
… as well as applicable SG&A, base tooling, tooling modifications
and acceptable mark-ups
Tooling Modification Cost Targets – Injection Molding
Mark Ups - Seat
Item
Description
Tier 1
Target
SGA&P, Direct Supply, In-bound Freight,
Inter-Company & V-V
Type of
Modification
Contents of Part Change
Size of
Change
New Adoption
~30mm
Location Change
~30mm
Modification
Cost
Add Pin or Boss
CSP & Self Procurement
RDDP
New Adoption
Volume <100k Units Annually
Drilling Hole
Volume 100k to 249k Units Annually
Location Change
Volume >250k Units Annually
New Adoption
~30mm
Location Change
~30mm
Shape Change
~10mm
Clip Base
Tier 2
Now included in the Cost Standards
Transfer Die Cost Targets – Base Tooling
Clip Post
>200mm
Cost Target – by Process
Blank Size
Feeder
Blank
Bend
New or Heighten (burn) and
Abolish (weld)
Draw
100-200mm
<100mm
10,000
Rib Change
>200mm
20,000
Shorten (weld & burn)
30,000
100-200mm
<100mm
45,000
>200mm
60,000
Extending or Reducing
80,000
100-200mm
<100mm
110,000
>200mm
140,000
Edge Shape
Change
180,000
Thickness
100-200mm
<100mm
230,000
>100m
Addition of Radius
Standard price of Cam
50-100mm
<50mm
Type
W<150mm
150 - 500
Single
Double
11
The same cost table approach is used to manage engineering
changes and to avoid cost walk-ups by the supplier
PRODUCT COST EVOLUTION
Actual material costs
Status
at SOP
$ / Car
7%
Revised
Target
13 %
Target costs
SOP
Original
Target
Time
12
The ultimate goal of understanding ideal performance is to
engender a continually learning organization
 Ideal performance is a constantly moving target
– Innovations, new processes, materials, new designs are constantly improving performance
– Cost management is a constant quest to understand ideal
– New process choices or improvements must always exceed the performance of their
predecessors – and this will be reflected in costs that can only get better
 Forces engineers, purchasing and suppliers to learn and understand underlying drivers of costs
– Allows for what if scenarios
– Places focus on major cost drivers
– Enables engineering teams to make value / cost trade-offs
– … and improve product design during engineering
 Enables productive dialogue between the supplier and the customer to jointly reduce waste /
cost
13
Annual development plans are used to foster mutually beneficial
long term supplier relationships that result in an advantaged
supply base
 Focus is on longer term, trusting, supportive relationships where customer and suppliers are
both committed to helping each other succeed (i.e., everybody profits)
 Data and fact driven expectations set annually, rather than negotiations or LTAs with simple
year-over-year improvements written into the contract
– Price tables and cost models to truly understand drivers of supplier’s product/process costs
– Target prices based on price tables and cost modeling
– Productivity and VA/VE cost improvements addressed separately
– Comprehensive explanations of how price, delivery, and quality targets were derived
– Assistance from customer to help suppliers achieve targets and tackle tough issues
– Supplier receives reasonable margin and customer receives reasonable price
– Supplier and customer share in investments and benefits from supplier’s breakthrough
improvement ideas
 The customer dedicates sufficient resources to gain a deep knowledge of their suppliers’
industries, including production processes and technologies
14
The cost methodology helps to establish an open dialog with
suppliers, resulting in more effective improvement plans at both
the product and supplier enterprise levels
IMPROVEMENT PLAN
T-1 Performance
 Document the ideal cost for each cost
element
 Determine each supplier’s gap to the ideal
Target
Result
Goal
Stretch
Defects/
Million
30
158
50
<30
Critical Field
Problems
0
0
0
0
On Time
Performance
100%
100%
100%
100%
0
0
0
0
Material
2%
2%
4%
4%
Manufacturing
Improvement
4%
4%
3%
4%
QUALITY
N/A
N/A
N/A
N/A
N/A
DELIVERY
Performance
Ratio
100%
100%
100%
100%
QUALITY
PPIR
N/A
N/A
N/A
N/A
DELIVERY
Performance
Ratio
N/A
N/A
N/A
N/A
CYCLE
TIME
Months
20
22
20
18
QUALITY
 Identify enablers to reduce suppliers gaps
YYY
Parts
 Building creative improvement plan for
enablers
DELIVERY
Mixed Kanbans
Supplier
Annual Plan
Program
Based
COST
Cost Element
Ideal Cost Supplier Quote Gap to Ideal Enablers to Lower Cost (Reality Changes)
Raw Materials
$
2.00 $
2.50 $
0.50 Reduce Scrap, Leverage Material Buy
Purchased Parts
0.75
1.00
0.25 Leverage Material Buy, Redesign, Reduce Scrap
Labor
1.50
2.00
0.50 Increase Labor Utilization, Automate, Low Cost Ctry
Machines
2.00
2.50
0.50 Increase Machine Efficiency, Tooling Optimization
SG&A
1.00
1.25
0.25 Reasonable Level / Management Efficiency
Profit
Total Cost
1.00
$
8.25 $
Year T Target
1.00
10.25 $
2.00
Reasonable Level for Industry / Services Provided
XXX
Parts
Prototype
Parts
Develop
Product
15
Individual supplier expectations for the year include corporate-,
plant- and part- level targets
Examples of Supplier Targets at Corporate, Plant, and Part Level
Client Name
INDIVIDUAL SUPPLIER EXPECTATIONS
Parts & Components
Corporate-Level Targets
Supplier Name
Supplier Code: XXXX
Plant-Level Targets
Supplier Name
Supplier Code: XXXX
2004 Customer Value Improvement Target
Part-Level Targets
Supplier Name
Supplier Code: XXXX
Quality
Text Box for Value Improvement Target (VE/VA)
Plant
Code
Commodity
OE
Target
Service
Target
Prototype
Target
Tier II Minority Sourcing Target
XXX-X
XYZ
XX
XX
O PPIR
100% On-time
Delivery/Zero
Mixed Kanbans
XXX-X
XYZ
XX
XX
O PPIR
100% On-time
Delivery/Zero
Mixed Kanbans
XXX-X
XYZ
XX
XX
O PPIR
100% On-time
Delivery/Zero
Mixed Kanbans
XXX-X
XYZ
XX
XX
O PPIR
100% On-time
Delivery/Zero
Mixed Kanbans
XXX-X
XYZ
XX
XX
O PPIR
100% On-time
Delivery/Zero
Mixed Kanbans
XXX-X
XYZ
XX
XX
O PPIR
100% On-time
Delivery/Zero
Mixed Kanbans
XXX-X
XYZ
XX
XX
O PPIR
100% On-time
Delivery/Zero
Mixed Kanbans
5%
(Measurement of Total Purchases for Customer)
2004 Customer Warranty Target
X PPM
Supplier Environmental Program Requirements
ISO 14001 Certification by 12/31/05
Individual Expected Tasks (IETs)
Delivery
Part
Number
Project
Target (Piece
Price + Tooling)
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXXX
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
XXXX
$XX.XX
$XX.XX
$XX.XX
$XX.XX
$XX.XX
$XX.XX
$XX.XX
$XX.XX
$XX.XX
$XX.XX
$XX.XX
$XX.XX
$XX.XX
$XX.XX
$XX.XX
$XX.XX
$XX.XX
$XX.XX
$XX.XX
$XX.XX
$XX.XX
$XX.XX
16
Another important aspect of the supplier development process is
supplier feedback on what the customer should do differently
Deterioration in a Customer Program Economics
from Award to Launch Due to Design Churn
$14
Tooling
($MM)
$12
+ 30%
Drivers of “Churn” by Development Stage
$13
$10
Concept
Development
Detailed
Design
 Sets unrealistic

expectations for
vehicle price point,
feature content,
cost and margins
that must be
reconciled during
detailed design

Decisions made
by strong
functional
chimneys create
infeasible
solutions that have
to be undone
$10
Design
Verification &
Prototype
Testing
$8
$6
$4
$2
$0
Award
$300
SOP
Piece Part Cost ($)
$250
+ 20%
$240
$200
$200
$150
Although each
function acts
rationally, the
result is a “random
walk” of
requirements on
the supplier
 Continue to
make changes
late in the
process to
accommodate
unforeseen or
unresolved
engineering
issues
 Additional
revisions to the
product drive
incremental
ER&D costs
$100
$50
$0
Award
SOP
17
For each category, the ideal supply chain structure will also be
defined
Right Plant
Structural:
 30-50 presses to achieve operating efficiency
 85% utilization
 $60 – 80 million sales
 We are 30% of each plant’s business
 Participate in cooperative resin purchasing
 Focus on design to cost as opposed to annual
productivity improvements
Right Network
 Suppliers aligned by segment – more than 1
supplier per segment to ensure competitive
tension
 Distributed geographical network to support
Midwest, South East US and Mexican demand
 Tight integration of design, molding and tooling
 >80% of sales to auto industry
Operating:
 Suppliers extremely capable at a few process
technologies but each plant is focused
 Operational focus => single process, low number
molds, resins, end products
 Design engineering and testing capabilities –
design experimental technical facility
 Lean operations and pull system
 Mold and process capability
 Latest cavity sensors
 Latest process controls
 Common presses and secondary equipment
 Common presses and secondary equipment
across plants
 Robust capacity planning capabilities
IT:
 Systems capable of efficient interface
 Own some tooling capability, strategic alignment
with tooling manufacturers
18
The first step is to evaluate how the supplier’s present
manufacturing footprint affects their competitive position and
assess the gap to ideal
Scale
Factor Costs
(Avg. Capacity by Plant)
(Avg. Labor Costs w/ 100% = Germany)
270
Supplier 0
305
Supplier 1
340
Supplier 4
270
Supplier 4
320
82%
60%
70%
80%
90%
Complexity
Flexibility
(Weighted Plant Avg. Produced Units / Model)
(Weighted Plant Avg. of Models per Line)
77
Supplier 0
105
Supplier 4
80
90
100
2.35
Supplier 3
110
110
Supplier 4
120
No flextechnology for
optimized
utilization
2.05
Supplier 2
102
Supplier 3
2.55
Supplier 1
98
Supplier 2
70
1.67
Supplier 0
Supplier 1
No clear focus
of sites
370
Too few low
cost sites
76%
Supplier 3
295
220
65%
Supplier 2
315
Supplier 3
89%
Supplier 1
Supplier 2
Too many
sites
85%
Supplier 0
2.45
1.5
2
2.5
3
19
You then build an ideal supply network footprint by segment – and
understand how the suppliers fit with this
Precision Molding
Rationale
 Total spend: 123M
 Ideal plant scale: $70M
 Our share: 50%
1.0
 Each plant is $35M spend
0.0
0.3
6.0
5.9
15.0
10.2
Ideal Supply Network for Precision
 Number of Plants:3 - 4
 Footprint:
– MI (2 plants)
– IN (1 plant)
– Mexico (potentially 1 plant if justified by
increasing volume)
4.3
1.0
0.0
2.2
0.0
0.5
0.1
0.0
20
This approach achieves significant performance improvements
Sources of Injection Molding Savings Compared to Current Supply Base
Mold change
technology, IL skills
and simple flows are
key enablers
100%
(1%)
Engineering
capability at
supplier
4-9%
(1%)
3%
(2-5%)
19%
(1%)
10%
(2-4%)
(5%)
(1%)
30-50 presses
(4%)
la
nt
Id
ea
lP
an
ni
ng
M
Sc
ra
p
iza
t io
n
Ut
il
R
IL
to
DL
O
ve
rh
ea
d
an
t
at
io
Medium Term
Pl
Fo
cu
s
Fa
ci
lity
Sc
al
e
er
y
De
liv
Bu
lk
Sc
al
e
ng
Pu
rc
ha
si
Cu
rre
nt
Short Term
21
Supplier and customer improvement opportunities are combined to
establish a joint agenda to deliver results
Joint Improvement Roadmap
Improvement Levers & Diagnostics
1
2
5
Engineering
Competency
Assessment
Concept
Definition
Technology
6
Advantaged
Network
Opportunity Area
Early Stage
Effectiveness
and
Efficiency
4
Process Effectiveness
15
Joint
Sourcing
Leverage
11
Boeing Supplier
Rates Suppliers
Service Parts
Shares IRAD project lists with
Prime for rating
1
2
3
Engages in joint technology
review sessions
1
2
3
Performance Metrics
Dealer Delivery
Design-Driven Cost Reduction
and Reduction of Functional Test
Requirements
8
Engineering
Capability
Maturity
Benchmarks
Ratings
R&D:
:
7
Design
Trades
Maturity
Attributes
16
Global
Footprint
Early Supplier Involvement
3
14
10
Reports IRAD funding that is
applicable to Boeing programs
12
1
2
3
Resets IRAD priorities based on 1
2
3
1
2
3
3%
Routinely responds to support
customer’s timing requirements
1
2
3
100%
Supports common T&Cs
1
2
3
jointMetrics/
technologyTargets
sessions
Supplier
(Need to be confirmed with Suppliers)
Part Ordering and Delivery
Bid and Proposal
9
13
Engineering
Integration
R&D applicable to Customer
(% of revenue)
opportunities to
Identifies
2005
Targets
leverage and
support
joint
marketing
Transaction
Efficiency
Joint Improvement Roadmap
Area
Party
Description
Timing
Owner
Status
Development - % on time:

ESI
Supplier A

Recent pricing / quotes have been systematically high compared to the cost
tables, resulting in lost business — define plan for reaching competitive cost
levels
Demonstrate tangible changes to impact cost levels
John
Smith
Sourcing – Ave Material cost reduction (2003 vs. 2002):
5-10%
Manufacturing
OEM



Engage Supplier A in electronics study
Respond to part redesign proposal
Engage site XYZ. in bid for interface units
Bill
Williams
Supplier Inventory Turns:
6-10
Average supplier lead time:
3 Months
Annual Lead time improvement:
15%
Annual Value Added Productivity Improvement:3-5%
Eng
Supplier A

Use May 5th meeting to submit design driven cost reduction ideas
John
Smith
Service - Average Repair turn-around (lead) time:
30 Days
OEM



Develop timeline for conducting lean assessment at DEF, HIJ, KLM & ABC
Fix XYZ SPMS data (currently shows red – issue is customer service not XYZ
manufacturing)
Move subassembly to China by year end
Mfg

Supplier A


Service
Supplier A

Create plan to execute lean assessments for all facilities (present status at
May 5th meeting)
Work to bring resolution to ABC and XYZ technical, quality, and business
issues
Complete make / buy and consolidation analyses for machining and board
stuffing (all plants) operations
Improve dealer shipment cycle times
John
Smith
Bill
Williams
22
Involving suppliers early in development is key to leverage the
total cost structure and suppliers’ innovation capabilities
Product Cost
structure
Margin
Purchased
Cost
0%-5%
40%
Purchasing alone
 Commercial negotiations can
only attack the tip of the iceberg
Purchasing supported by Engineering
 Improved cost of product
 Improved functionality
Manufacturing
20%
Engineering
5%
Overhead
Others
Potential Activities
Supplier integrated with a cost and
revenue perspective
 Bring new technology
 Accelerate product to market
30%-35%
 Share customer understanding
Typical Cost
Breakdown
23
Involving suppliers in innovation will allow the organization to
access a larger pool of opportunities in achieving target product
costs
Breakdown of Savings by Source
(Client experience)
Price
Negotiation
16%
Re-Sourcing
45%
17%
Design
22%
Technology
Improvements/
Advancements
24
Toyota’s commitment to understanding product costs at a process
level started as a way to support early product development
cost/value trade-offs
Cost Engineering
Cost Engineering
 Engineering owns cost target and drives achievement together with Purchasing
 Functional requirements instead of over-engineering
 Cost management (Value analysis, trade-off management etc.)
COST TARGET
VEHICLE
PROFIT
Development Process
Product
Definition
Brand,
Design,
Marketing
Technical
Concept
Business
Case
Engineering
Finance,
Purchasing,
Chief engineer
Go
Ahead
Decision
Development
Engineering
Launch
Value: High in market
Cost: Minimize
 No over-specifications
 No cost increase after
contract signing
 Product cost target
achieved at launch
 Benchmarking of requirements, options & features
 Cost reduction ideas & implementation support
 Concept competition during sourcing process from preferred
suppliers
Supplier Involvement
25
We see a number of levers that take the supplier early involvement
process to the next level
 Establishment of joint technology roadmaps
– Done for the top tier of high performance, high innovation suppliers
– Review and influence the supplier’s product development / innovation plan
– Co-ordinated with the customer’s product plan so that innovations are available to plug and
play
– Innovations may be exclusive to the customer for a period of time, say six months
 Driving early innovation competitions with 2-3 suppliers on design intensive systems,
subsystems and components to access the best supply base thinking before locking in the
design and cost
 Tapping into the suppliers’ insights into end customer preferences on key areas to create end
consumer value
– Many suppliers have extensive consumer knowledge built up across customers
– Represents an opportunity to optimize the consumer value / cost curve
 Use of cost tables to work true design specification / cost trade-offs and not just design
specification / price trade-offs as is done today
 Leverage the supplier’s product architecture intelligently to reuse existing product that the
supplier has or design in high volume, cross-customer part standards
26
One client recently reviewed the innovation plans of three
important suppliers, producing significant benefit in terms of
supplier focus and program alignment
Programs Rated Supplier R&D on Importance and Overlap
Composite
Ranking
A1 View
A2 View
A3 View
A4 View
Project 1
9
High
Medium
Medium
Medium
High
Project 2
9
High
Medium
Medium
Medium
High
High
R&D Project Name
Tech
Maturity
A1 Overlap A2 Overlap A3 Overlap A4 Overlap
Technology Focus
Area 1
Project 3
Low
9
High
Medium
Medium
Medium
Project 4
Medium
7
No Rating
Medium
High
Medium
7
High
Medium
No Rating
Medium
Project 5
Project 6
High
5
No Rating
Medium
Medium
Low
Project 7
High
4
No Rating
Medium
No Rating
Medium
Project 8
High
4
No Rating
Medium
No Rating
Medium
Project 9
High
3
No Rating
Low
No Rating
Medium
2
No Rating
Low
No Rating
Low
2
No Rating
Low
No Rating
Low
2
No Rating
Low
No Rating
Low
2
No Rating
Low
No Rating
Low
Project 10
Project 11
Low
Project 12
Project 13
High
Medium
Medium
High
Medium
Medium
High
Medium
Medium
Medium
High
High
Medium
Medium
High
Medium
High
Medium
Medium
27
Surfacing alternative design concepts from suppliers is a major
lever– funding the design activity separately from production can
have merit
Development
Phase
ALTERNATE ESI / RFP PROCESSES
Typical
Suppliers
Respond to
RFI
RFI
OEM
Evaluates
Responses
OEM Drafts
RFP
RFP
Contract
Award
BTP
Type 1
Pick Key
Suppliers
Architecture
Single RFP
Round
table
RFI
Contract
Award
BTP
Component Spec
Round
table
Down-select
Type 2
Supplier Bid
List
Developed
BTP
Success
Identify System
to be Redesigned
Custom
RFP
RFI
BTP
Type 3
Component Spec
Custom
RFP
Functional
Requirements
Contract
Award
Component Spec
New Contract
Award
Review
Component Spec
Failure
Select Second
Source
28
“Intelligent architecture” is the process of working with suppliers
to leverage cross-customer scale
Cross-OEM Cost Savings Potential:
Re-Use Within And Across Customers
Component XX2004
$9
$8.35
$7.91
$8
VM #3
Seat B.O.M.
Frame
Seat B.O.M.
Frame
Frame
VM #1
Mechanism
Small Car
Trim
Part #1
Mechanism
Foam
Part #3
Seat B.O.M.
VM #2
Mechanism
Small Car
Trim
Part #8
Foam
Part #9
Large Car
Part #11
Part #2
Part #13
Part #4
Trim
Part #5
Part #6
Foam
Part #7
Part #7
Small Car
Large Car
$7
Part #15
Part #2.v2
$6
Part #16
Large Car
Part #18
Part #2
Part #17
$5
Part #20
Part #10
Part #21
Part #12
Part #14
Part #19
Unit Cost
$6.86
Cost with a
cross-VM
approach
$7.06
$5.99
$4
$3
$2
$1
$0
Suppliers can
leverage both
within AND
across VMs
Programs
Component
Volume
A
B
C
D
All
5
1
4
1
1
1
1
1
11
1
730,000
600,000
375,000
300,000
2,015,000
29
Example …
Design Re-Use Example Clusters
30
People development and hiring is a major part of the
transformation to the new sourcing model since the required skills
are different
Critical Skills in the New Purchasing Model
 Insight and knowledge to know what well run facilities look like
 Aptitude to develop and apply cost tables, models and understanding
 Capacity to drive continuous improvement with a constant focus on removing waste
 Ability to recognize competitive suppliers who can also continually improve upon performance
 Effectiveness in interfacing with engineering and product planning
 Recognition of inherent benefits of stability in design specification and demand
 A focus on productivity improvements separately from VA / VE improvements
 Ability to help suppliers drive the identified performance improvements
31
Aligning metrics – both within the Purchasing organization and
how Purchasing is measured – requires a true paradigm shift
Common / Traditional Purchasing Metrics
 Piece price savings typically the key metric for most of
Purchasing
 Purchasing held responsible for material cost,
Engineering for design/quality
 Savings generally price-based and do not consider
model-to-model improvement / low cost design upfront
 Price and negotiation-based metrics create incentive for
wrong behavior (start with less than ideal design / cost
and negotiate to reduce price)
New Metrics
 Focused on performance relative to ideal, and
improvement against it
Roadblocks and Challenges
 Often the best performers under the
traditional system are most resistant to
change
– As the new approach no longer
focuses on price reductions, it
appears to question earlier
successes
– Tough negotiation skills are no
longer the key success factor
 Traditional leadership expectations of
Purchasing, Engineering, Finance and
Sales all need to change to drive a
paradigm shift top-down throughout
the organization
 Key dimensions include cost, quality, delivery, innovation
 Engineering and Purchasing are both responsible – and
accountable – for achieving material cost targets
 Price-to-price savings are down played
32
Measuring yourself and the supply base against this ideal
performance is a key element of this shift in philosophy
Cost / Price Reduction Needs To Be
Based On Reality Changes
Part XXX
Cost Element
Price
Quoted
Price
Raw Materials
Traditional Metrics:
Price-to-Price Savings
$2.69
5%
$2.55
5%
$2.43
5%
Ideal
Improvement
$2.17
$
$2.30
Agreed Cost with
Supplier
Improvement
Plan
2.50 $
0.50
Purchased Parts
0.75
1.00
0.25
Labor
Machines/Building/
Facilities/Tooling
1.50
2.00
0.50
2.00
2.50
0.50
SG&A
1.00
1.25
0.25
Total Cost
New Metrics:
Performance Vs. Ideal
Supplier Gap to
Quote
Ideal
2.00 $
Profit
$2.35 Targeted
Cost
Modeled
Ideal
Cost
1.00
$
8.25 $
1.00
10.25 $
-
Enablers to Lower Cost
(Reality Changes)
Reduce Scrap, Leverage Material
Buy
Leverage Material Buy,
Redesign, Reduce Scrap
Increase Labor Utilization,
Automate, Low Cost Ctry
Increase Machine Efficiency,
Tooling Optimization
Reasonable Level / Management
Efficiency
Reasonable Level for Industry /
Services Provided
2.00
 In the new model, price reductions without
underlying cost improvement, i.e., “reality
changes”, are not enduring
 The new metrics are thus based on how close
cost and reality are to the ideal
$1.49
Ideal Cost
Target
1
2
3
Time
(in years)
33
This new model requires a fundamental shift in mind set
TODAY
 Price based supplier competition
– Typical supplier practice of bidding at or below
cost because it intends to make it up on
changes
– So many suppliers that the focus must be on
managing transactions and emergencies
– Organization mindset of frequent bidding and
supplier churn
– Hard to enter into collaborative relationships
 LTAs with built-in YOY or PO to PO price
reductions
– Incentives based on year over year reduction
– Difficult to understand levels of
competitiveness for productivity, materials,
and engineering
– Arguably, suppliers attempt to incorporate
LTAs in price
 Frequent price based negotiations, often
contributing to combative interactions
TOMORROW
 Continuous improvement through elimination of
waste – and knowing where waste is
– Advantaged network and footprint
– Set and meet targeted / required cost
reductions with suppliers
– Targets for productivity, material, and
engineering improvements set and monitored
separately
 Reality-based cost standards, models, and
understanding are critical tools for moving to
advantaged supplier model
 Suppliers are compared to best ideal costs
program by program and evaluated at least each
year, and targets are set accordingly
– Cost, quality, and delivery based improvement
targets
– Ensure supplier is advantaged over market,
and know what is ideal
– Integrated relationships and cooperative /
knowledge sharing
34