Delphi Corporation has achieved a remarkable transformation in supply management by applying the principles of lean manufacturing. It hasn't necessarily been easy; the road to lean is not for the faint of heart. But the benefits realized—in cost savings, in more streamlined operations, and, perhaps most importantly of all, in the greater sense of trust among supply chain partners—have made it all worthwhile.

Over the past decade, purchasing executives and management scholars have extolled the benefits of working closely with suppliers. This approach tends to fall under a variety of banners, such as supplier partnerships, strategic supplier alliances, and integrated supply chain management. Unfortunately, all too often these initiatives fail, and original equipment manufacturer (OEM) customers revert to former strategies of adversarial relationships, characterized by aggressive negotiations focused on supplier pricing. The result is a supply function that fails to deliver on both its potential and the potential of its suppliers to provide a sustainable competitive advantage to the customer and to the supplier.

Delphi's executive leadership team believes that the key to becoming a world-class enterprise is to extend the lean enterprise model, used effectively by companies such as Toyota and Honda, to our supply base. This involves partnering with suppliers to eliminate waste—which results in added costs—from all portions of the value stream. Delphi's objectives are to have unsurpassed world-class quality, double-digit gains in model-to-model cost reductions, leading-edge designs, and record profitability. To achieve these, Delphi is focusing with its suppliers on total cost. Total cost management involves understanding the cost, quality, delivery, and technology drivers for each of Delphi's commodities. With these drivers in mind, Delphi and its suppliers work cooperatively to identify and execute cost reduction opportunities while still maintaining zero defects, flawless launch and delivery, and optimal design.

Since 2002, Delphi Global Supply Management has focused on implementing nine integrated strategies, based on best practices that are leading the company to a leaner supply base. As Exhibit 1 illustrates, we visualize these as nine gears that must work in a synchronized, integrated manner. These nine strategies or "gears" are strategic sourcing, cost management, lean supplier development engineering, new model flawless launch, systems infrastructure, quality improvement, people development, supplier relationships, and communication. Together, they are delivering benefits such as productivity gains, improved quality, and waste elimination.

This article traces the evolution of Delphi as a lean enterprise and the changes being implemented by our Global Supply Management team to help the company accomplish its goals and objectives. In particular, this article focuses on three of the nine strategies: strategic sourcing, cost management, and lean supplier development engineering.

I want to place into context the strategies being implemented by Delphi's Global Supply Management team. To do that, it's instructive to understand the roots of Delphi. Delphi was formed from the parts-making operations of General Motors in 1991 and was incorporated in 1998. The company became independent following its 1999 initial public stock offering. Today, Delphi is a world leader in mobile electronics and transportation components and systems technology. The company employs approximately 186,000 people in 41 countries. Revenues in 2003 totaled $28 billion.

Our efforts in supply management follow the lead of Delphi's top management, which introducted a critical lean manufacturing initiative in 1996. Led by J.T. Battenberg III, chairman, CEO, and president of Delphi, the company launched the Delphi Manufacturing System, or DMS. This system is the cornerstone of the company's drive to become a lean enterprise.

Modeled after the principles of the Toyota Production System, DMS has enabled the company to be a lean manufacturer focused on customer needs. DMS addresses everything from how supplies are delivered to employee movement in the plant, with the goal of continuously increasing efficiency and eliminating waste in a cost-effective manner. DMS focuses on six specific but interdependent elements aimed at eliminating waste and improving product flow:

• Employee environment and involvement: Creating a team-based work organization with joint efforts between workers and management, with shared goals and a commitment to continuous improvement.
• Workplace organization: Paying attention to how employees, equipment, and materials are coordinated, providing a safe, clean work environment.
• Quality: Focusing on variation reduction, waste elimination, and first-time-through customer satisfaction.
• Operational availability: Minimizing nonproductive time for operations.
• Material movement: Assuring on-time delivery of required materials.
• Flow manufacturing: Responding quickly, safely, and efficiently to customer demand with high-quality, high-value products.

One measure of the success of DMS: As of 2004, Delphi has received 20 Shingo Awards for Manufacturing Excellence. Established in 1988, the Shingo Prize for Excellence in Manufacturing is named after Japanese industrialist Shigeo Shingo. This prize is awarded annually to companies that excel in the application of world-class practices and techniques to achieve superior customer satisfaction and business results.

By 2001, it was clear to Delphi's top management that the lean manufacturing principles implemented through DMS needed to be applied more vigorously to our supply base. The competitiveness of the automotive market had made expansion of the lean initiative a priority, and with 60 percent of Delphi's costs represented by the purchase of parts and materials, it was imperative to move in a new direction.

In 2001, the supply management organization was still practicing the traditional approach of negotiating annual price reductions with suppliers. Although this approach provided a steady source of cost savings that were important to the company's overall financial well-being, it was only delivering single-digit cost-reduction performance.

The company recognized that change needed to be made. Donald Runkle, Delphi's vice chairman and chief technology officer, took the lead role in recruiting me to become vice president of Global Supply Management. Before joining Delphi, I had more than 40 years of experience in purchasing, logistics, and manufacturing, having been director of worldwide purchasing at TRW, senior vice president of purchasing at Honda of America Manufacturing, and vice president of global supply management at John Deere. I believe that Runkle and Battenberg went outside the organization to signal the dramatic change that Delphi needed to make in its supplier relationships. My mandate was to drive the implementation of supply chain management best practices.

Implementing Lean Supply Management

In 2002, the Delphi Strategy Board (comprised of top management) recommended, and the Board of Directors approved, an organizational change that combined manufacturing, engineering, and purchasing under the leadership of Don Runkle. The company took this step in order to intensify Delphi's lean transformation. Collectively these three functions represented approximately 90 percent of Delphi's total cost structure. This gave us the opportunity to more fully integrate our supply management team members with colleagues on the plant floor and in engineering. It also allowed us to link Delphi suppliers much more closely with these functions—and with our lean initiatives.

We joined together in integrated task teams to meet objectives set by Runkle to improve quality and processes, enhance operating efficiencies, and significantly reduce costs both within Delphi manufacturing and throughout our supply base. With a total spend of approximately $17 billion in direct and indirect purchases, our global supply management team was expected to play a major role in achieving this latter objective.

We needed to help our suppliers better understand the significant cost pressures facing Delphi because of customer demands. Our customers, which face significant headwinds on items like pensions and other post-retirement benefits, seek annual price reductions from their suppliers. So, we needed to work much more closely with our suppliers to get and keep costs out—not merely push them onto someone else.

Thus, in 2002, our Delphi Global Supply Management leadership team set goals and established strategies (the "gears" illustrated in Exhibit 1) to advance lean into our supply base. The Delphi goals for supply management were to take a total cost focus, adopt strategic sourcing, extend lean principles to suppliers, and establish deep supplier relationships. To accomplish these goals, supply management had to commit to change. Specifically, we had to change by asking our talented and experienced commodities team to develop more comprehensive commodity and supplier strategies and to work with other colleagues to engage in strategic sourcing. This change would involve shifting from a price to a cost focus and launching lean into the supply base.

Delphi's top management supported our resource requests and we created teams to focus on strategic sourcing (including global sourcing) for direct and indirect purchases, cost management, and lean supplier development

Strategic Sourcing

Prior to 2002, our commodity teams had provided some benefits using traditional purchasing methods such as rounds of price negotiations. However, Delphi had a global supply base of nearly 7,000 suppliers. By any measure, that's a lot of relationships to manage. Our Global Supply Management leadership team knew that we had to reduce that number to better focus on partnering with suppliers who would share our commitment to lean. With dramatically fewer suppliers, Delphi could be a more effective customer, concentrating with our key partners to take waste out of our supply chain. We also could involve suppliers much earlier in the new product development process—reducing costs and improving speed to market. In short, we need fewer suppliers in order to be agile and highly competitive.

Today, we have a direct material supply base numbering about 4,000 and expect to move to about 1,000 global suppliers, segmented by supply market complexity and total dollar value. Our vision is that components with high value and complexity are core and ultimately will be sourced to a group of about 100 strategic suppliers with whom we will have close and deep relationships. Lower value materials that still have high complexity may require 150 to 200 near-core suppliers. Niche suppliers—those with unique products or with patents that restrict Delphi's ability to compete—may represent about 100–200 suppliers. Commodities with low value and less complexity will be sourced using a more conventional approach—included here are about 300–500 suppliers.

Our commodity managers and their teams are developing global commodity strategies for each commodity area and for each strategic supplier. These are simple "one-page road maps" about how to gain competitive advantage in joint value streams. They are common, global strategies. Using them requires the buy-in of Delphi stakeholders—including engineering, operations, and sales. It's virtually all of Team Delphi. All the players need to agree to the strategies. And then we must execute these strategies successfully.

We have high expectations of our strategic suppliers. They must exhibit a history of flawless launches, meeting zero parts per million (ppm) defects and zero disruptions. They also must be continuously improving first-time quality. Furthermore, they must be willing to work with Delphi early in the program design and development phase in order to meet cost targets that satisfy Delphi's model-to-model cost improvement targets. And they must be committed to the relationship with the right attitude toward continuous waste reduction and lean thinking.

Cost Management

For more than 15 years, most U. S. auto manufacturers have focused almost exclusively on price reductions through aggressive competitive bidding. While this strategy may have provided short-term benefits, it has done considerable damage to supplier relationships. Over the longer term, it is not a sustainable model. A more effective approach is to work with suppliers by focusing on eliminating or reducing costs, not negotiating prices. That means being tough but fair with suppliers—making decisions based on facts.

Our Global Supply Management leadership draws on the experiences of former Toyota and Honda purchasing management, and we have been able to move relatively quickly to develop cost-management expertise within the supply management function. This is important because effective cost management requires the ability to develop and manage cost standards that determine what a part or service "should" cost, with real details—not hypotheticals. By truly knowing what a part or service should cost, the design and sourcing dynamics change from an "auction" mentality to a joint waste-elimination focus. This leads to better designs, better processes, and the highest level of true competitiveness. It also requires mutual trust, utmost integrity, and confidentiality because all elements of cost are being studied—the books are open, and the discussions are detailed.

Merely asking for cost reductions does not help suppliers become more competitive. Supply management needs cost management tools and models that allow for informed purchasing decisions. It is too easy to compare suppliers based on price alone. However, price is like a shadow, cost is the reality. Cost management is needed for effective supplier development in order to understand what, where, and when to make improvements and process changes.

Today, Delphi has put in place cost management leaders who work with Delphi buyers, lean supplier development managers, and suppliers to understand processes and document costs and opportunities to eliminate waste in the supply chain. Again, good working relationships with suppliers are essential to this strategy's success. As the Delphi supply base becomes smaller, we will be able to work even more closely with suppliers and to more easily share relevant cost information.

Delphi buyers are developing user-friendly cost models for sub-commodities and are establishing cost standards. These standards are benchmarked across different suppliers and different regions to develop world-class cost standards. Sourcing strategies and supplier negotiations incorporate this information to achieve best-in-class service to customers.

The cost standards allow Delphi to clearly see the gap between our price and the "should cost" or cost standard. On average, we are seeing gaps of 20 to 30 percent compared to current prices, so we are quickly understanding the value of cost management vs. rounds of price negotiations. The process of developing and using cost standards seems simple, but, being realistic, not all of these gaps are easily or quickly remedied. In many cases, new designs must be reviewed, tested, and validated. This process takes time, trust, and joint commitment.

Eventually, we hope that all Delphi buyers develop the capability of understanding and using cost management techniques and that all suppliers will be willing to share information proactively with Delphi and focus on continuous cost reductions.

Lean Supplier Development Engineering

Implementing lean in the supply chain requires a long-term commitment and a shift in purchasing focus from supplier prices to supplier cost management. It generally takes five to six years to significantly move suppliers to lean. As noted, we began by developing our internal purchasing capabilities in strategic sourcing and cost management and investing resources in lean supplier development activities.

Lean supplier development engineering requires having expert engineers dedicated to enabling suppliers to achieve the best levels of lean manufacturing in their plant operations. The results in waste elimination, process improvements, operational productivity and efficiencies, product quality, and delivery often are dramatic

In 2002, our Global Supply Management leadership focused on establishing a formal lean supplier development program. They set up common processes and worked with divisional purchasing directors to create a common organizational structure and to prioritize suppliers for involvement. All agreed that these would be suppliers with potential to be long-term partners.

By early 2004, 57 supplier development engineers were part of the Global Supply Management team. In 90 percent of the cases, these people came from Delphi's existing manufacturing operations—leveraging Delphi's terrific depth of lean manufacturing knowledge.

The payback can be significant. From my experience, the investment in resources to implement lean supply generally yields a 3-to-1 return on investment. Most of the time, the cost savings generated are shared. An additional benefit is the trust forged between the supplier and its customer.

Delphi's lean supplier development process begins with a top leadership meeting involving one or two of our senior managers, the supplier's CEO, and myself. It's important that we demonstrate our commitment to this process and to our supplier. We want the supplier's top management to understand and actively support our lean enterprise model. In some instances, lean represents a fundamental change in our past approach to dealing with suppliers.

After leadership's approval, the Delphi lean supplier development team and the supplier establish expectations for each other in areas such as resources and benefit sharing.

Since the program's launch in November 2002, Delphi has held 85 top management meetings with suppliers, all of which are now involved in our lean supplier development process. The results are impressive. Suppliers that are involved in the process are experiencing the exact same double-digit improvements as Delphi's manufacturing operations. (See sidebar on page 36 for one example.) Reduction in people costs range from 20 to nearly 50 percent, increases in productivity range from 30 to 60 percent, first-time quality has improved in a range of 10 to 45 percent. Conceptually, Delphi's value proposition is to share gains on a 50/50 basis with suppliers, but each situation is evaluated individually. Our approach is not about eroding margins; it is about reducing waste and thereby cost. Just as margins are important to Delphi, our strategic suppliers also need them to remain healthy.

Other Lean Initiatives

There are other lean initiatives underway within Delphi Global Supply Management. We have nine gears and each one is moving. On the people side, new staff and new processes mean retraining and developing a new culture. Part of the lean transformation strategy is to document skills for each position and create self-assessments and supervisor assessments. We've also established a student internship program, working with a number of outstanding universities such as Arizona State University, Bowling Green State University, Michigan State University, and Western Michigan University.

Delphi Global Supply Management also has launched a number of e-business initiatives focused on such areas as supplier management, materials management, exchanges, collaborative product design, and reverse auctions. And there's a supplier portal for quick access to information and data.

We've also established a global supply management communications function, which includes communication with stakeholders both internal (for example, manufacturing plants and other departments) and external (suppliers).

Adopting the lean supply approach is not for the faint of heart. It requires two key elements. First, lean supply requires an investment in talent and resources. Delphi's experience has been that these investments provide an attractive payback. However, such investments sometimes seem to run counter to standard operating practices in this era of downsizing, outsourcing, and focusing on short-term financial results. Fortunately, top management at Delphi is committed to implementing lean across the entire enterprise.

Second, it requires a long-term commitment. Lean capabilities take years to develop and require constant diligence to maintain. Toyota is reaping the benefits of lean through growing market share and record profits while its competitors struggle. However, Toyota first began implementing lean practices 50 years ago. Maintaining progress and commitment to major initiatives can be especially difficult when the average tenure of CEOs in large North American companies is now only three years.

Delphi is still in the early stages of its lean journey, but we can already see the glimmer of golden light on the road in front of us. Nevertheless, we expect that not all of Delphi's suppliers will want to take the journey with us. And even those that say they are willing are skeptical. Why is that? Because they simply don't trust Delphi. Regretfully, there's no nice way of putting it. After years of being pounded with the heavy-handed approach, they just can't muster the faith, will, or commitment to shift to this new lean paradigm—even when it means larger profits, higher quality, and enhanced competitiveness for them. They just don't trust Delphi because of bad past experiences with customers that promise trust but fail to deliver on commitments and responsibilities. We must change this viewpoint.

Lean is a journey. Lean is a road to success. Lean is dependent upon strong and long-lasting relationships. Lean is dependent upon trust. And, trust is like a tree. It takes a long time to grow and mature—when it does, it has deep roots and a broad canopy. But, early in its development, one whack with an ax is all it takes to destroy it. Each chief purchasing officer needs to be the guardian of the ax.