Chrysler's Leap of Faith: Redefining the Supplier Relationship
By Thomas T. Stallkamp -- Supply Chain Management Review, 6/1/1998
Last year, the father of corporate re-engineering, Dr. Michael Hammer, spoke to an off-site meeting of Chrysler's senior managers in northern Michigan. He talked about great companies that have turned bad—and how easy it is to become complacent through short-term success.
We thought it was a great talk. (In fact, many of my colleagues at Chrysler are still talking about it.) They especially remember a point Michael made about planning for long-term growth, using a quote from Leonid Kravchuk, the president of Ukraine. Here it is again: "Yesterday," Kravchuk said, "we stood at the edge of a giant abyss. But, today, we've taken a great step forward!"
I'd like to step off the edge myself and suggest that, sometimes, taking a leap of faith really is a pretty good idea—especially when everything else you've tried, on what appeared to be solid ground, simply isn't working. That's just what we had to do at Chrysler a few years ago.
Through its first eight decades, the American automobile industry was organized in vertically oriented, functional departments, or "chimneys." (See Exhibit 1.) The designers came up with an idea for a car and sent it to the engineers, who made their calculations and sent it over the wall to the procurement people, who accepted low bids for the parts the manufacturing people used to build the car. Eventually, the marketing people got a new product to sell.
Suddenly, the traditional way of building vehicles in Detroit was out of date.
About 10 years ago, when the now-famous Japanese keiretsu system of manufacturers and suppliers working in lockstep was threatening to put us out of business, we realized that to become competitive again, we had to radically redesign our entire process of planning, producing, and marketing cars and trucks. That's when we took our first "great step forward" at Chrysler and simply threw out our old system. In its place, we created what we call "platform teams"—cross-functional, inter-disciplinary teams of people dedicated to each of our major vehicle types, or "platforms." We created separate platform teams for small cars, large cars, minivans, Jeeps, and trucks, as shown in Exhibit 2.
Today, everyone involved in the development of new Chrysler vehicles—all of the designers and engineers; procurement and supply professionals; manufacturing, marketing, and finance people; and, significantly, representatives of our outside suppliers—is co-located at the Chrysler Technology Center. They all work together, cooperatively, to develop innovative new Chrysler cars and trucks. And the hands-on, on-site role of our supplier representatives is critical because they are the people responsible for the majority of the 4,000-plus parts that go into each of our cars and trucks.
People outside of the organization often are surprised to learn that Chrysler is about 70 percent outsourced and that we don't make some of the things most of our customers would expect us to make, like steering wheels and seats and door panels. But it's really to our advantage to be able to concentrate on sheet metal, engines, transmissions, and electronics—and to let other experts supply us with everything else we need.
Today, we operate the largest centralized supply function in American business. In fact, we'll write checks for more than $40 billion in purchases this year. That's why it is very much in our interest to maintain the best possible working relationships with our suppliers.
Under that old "chimney" system, relationships between the Big Three and its supply base were among the worst in American industry. Our vice chairman, Bob Lutz, likes to call it industrial feudalism: Chrysler and the other automakers acted like feudal lords, viewing the suppliers as lowly serfs forever at their beck and call.
Not surprisingly, whatever minimal levels of trust that were left in that system during the '70s had largely evaporated toward the end of the "chimney" era. In fact, there was outright hostility on both sides because the Big Three auctioned off contracts at low bid, then became upset with added costs that always crept back in. The suppliers hated their pint-sized profit margins and tended to run and hide whenever we began to talk about cutting costs.
About nine years ago, we realized we had to bring an end to the old industrial feudalism and get Chrysler and its supply base out of the Middle Ages once and for all. That's when we took another "great step forward." We decided to swallow our pride and tell our suppliers we knew it was time to replace our long-standing adversarial relationships with some new level of understanding that would benefit both us and them.
The only problem was, we weren't really sure where to find that "new level of understanding." But after blending a lot of ideas together, we decided that what we really wanted to do was to convert Chrysler's traditional purchasing organization into a supply organization.
In other words, we wanted to build an organization that viewed itself not just as "buyers of parts," but as informed professionals who could manage material flows all the way from the extraction of raw materials from the earth to scheduling final assembly of components into finished vehicles in our plants. But we also realized that to make that happen, we had to find ways to truly make our suppliers our partners.
SCORE Program Opens DoorsChrysler took a big step toward improved supplier relations in 1989 when we introduced the SCORE program. Its success is ironic in a way, because SCORE is an acronym for "Supplier Cost-Reduction Effort"—something that sounds like a leftover from the old "command-and-control" days in Detroit. Yet it's really a unique program that provides a system for reducing costs and waste without reducing our suppliers' profit margins.
Under SCORE, we expect all of our suppliers to submit cost-reduction suggestions that result in savings equal to 5 percent of their annual sales to Chrysler. We establish voluntary sharing of savings with each supplier, and all of the system's cost savings are passed on to us.
Suppliers can participate in SCORE in many ways—through suggestions for improvements in product design, processes, volume production, material handling, quality, tooling, and other areas. The program gives them a chance to continually re-engineer their business—and to be rewarded for continually improving ours.
SCORE also has proved to be a very effective communications program between Chrysler and its suppliers. It's worked so well, in fact, that our annual SCORE goal was increased from a little more than $250 million to more than $1 billion in just four years. We've achieved—and surpassed—that annual savings goal every year, including our target of $1.5 billion for the 1998 model year.
Remember the story about the 19th century bureaucrat who thought the U.S. Patent Office should be disbanded because, in his opinion, everything worthwhile already had been invented? Some naysayers thought we'd have the same problem. They said it wouldn't take long for our suppliers to run out of SCORE ideas.
In fact, just the opposite is true. Innovation sparks more innovation, and our backlog of SCORE suggestions has steadily increased, year after year. Importantly, we continue to approve and implement two-thirds of all the suggestions we receive, even though the rate of submissions has more than doubled from just two years ago.
So, despite our very impressive results to date, SCORE isn't close to peaking. For that reason, we're confident we can continue creating even greater savings in the future. It's important to realize, too, that new SCORE suggestions create carryover savings that grow each year, like compounded interest. Because SCORE savings apply to both current and future products, this year's savings will continue to roll forward.
SCORE has become our best-known procurement and supply success story at Chrysler, but it's just one of four elements that differentiate our approach. The second is target costing, a very effective replacement for the old competitive-bidding system. The third is what we call our Extended Enterprise concept of supply chain management. The fourth is a unique-to-Chrysler centralized supply concept, which is designed to integrate the operations of our suppliers with those of our assembly plants. Each of these initiatives is discussed below.
Target Costing at ChryslerBack in the "chimneys" era, we whipsawed our suppliers for the lowest possible price until they screamed "Uncle"...or something else. Today, our approach is to determine what the customer is willing to pay for a new vehicle, break that cost down to systems or components, and then do whatever is necessary to reach that target cost.
Exhibit 3 shows how that approach works: The first bar depicts the actual cost of a current Chrysler vehicle, plus costs that would be added at a future content level, adjusting for added features and higher costs. The second bar shows potential cost reductions achieved through the competitive bid process. But the third bar shows our target cost, made possible by a combination of cost-management techniques like re-engineering and improved manufacturing processes.
As a result, we're projecting annual savings to Chrysler of almost $9 million over the previous car. And that's just on one component.
Designing the Extended EnterpriseAs part of our Procurement & Supply organization's contributions toward new-vehicle programs like the Intrepid and the Concorde, we work to ensure that all our vehicles come in under target cost. We've found that one of the best ways to do that is by leveraging our supply base through Chrysler's Extended Enterprise.
Many companies are working to streamline their supply chain—and, of course, so are we. We want to work with only the best performers to create stronger, more efficient relationships while improving communication and performance throughout the chain. To achieve this objective, we are going far beyond simple rationalization of a traditional supply base. We're working to create an entirely new approach to supply chain management.
One of the best ways to explain the Extended Enterprise is to contrast what it is—and what it isn't. It is a long-term, Chrysler-coordinated process designed to build and strengthen relationships with our suppliers. It is not a glossed-over "program of the month" based on the old tactics (and leading to the same old fisticuffs) that characterized our past love-hate relationships.
The Extended Enterprise has been carefully designed to replace the old feudal system once and for all with a seamless, horizontal, value-added chain that effectively links all members of our team. In every project one of our goals is to pass on as much ownership as possible—all the way down to the lower tiers of the supply chain. Thus, creating the Extended Enterprise represents another "great step forward" for us because it demonstrates a newfound willingness on Chrysler's part to let our suppliers be the real experts.
Today, we consider all of our suppliers—going back all the way to the raw-material sub-suppliers that dig up the clay that goes to our foundry—to be equal partners with us in a value-added chain. It's important to emphasize, as Exhibit 5 shows, that the chain does not end at Chrysler's front door. Rather, it goes through us to the retail customer.
That's easy enough to plan on paper. Yet as Exhibit 6 suggests, putting it into practice is another matter. Even with fewer suppliers, our supply chain is still a complex maze of Tier One assemblers, Tier Two component suppliers, Tier Three sub-component suppliers, and Tier Four raw-material suppliers.
We want each of our suppliers to understand where it is in the stream of activities that lead from raw-materials procurement upstream to the delivery of each finished Chrysler vehicle downstream. We've been telling them that a good way to begin is by becoming better acquainted with their neighbors upstream and downstream. (Or as some of our Chrysler people like to put it, we want them to "know their flow.") They can then work to figure out what they can do to help others, what others can do to help them in return, and what we can all do together to build better vehicles at lower cost
The point is that we're quite serious about managing the flow of material from beginning to end. We are committed to integrating our suppliers as members of our team, sharing new ideas and working in tandem with us each day. That's why we say we want to get the word "purchasing" out of our vocabulary. We're no longer a "buyer of things," just as our suppliers are no longer simply "makers of things." Rather, we see ourselves as a supply organization that manages both the flow of material and the flow of information necessary to build great cars and trucks, hour after hour and day after day.
Putting that belief into action, we've successfully integrated many functions other companies traditionally have kept separate. At Chrysler, for example, supply coordinates engineering changes with our assembly plants and suppliers; supply schedules the plants and issues supplier releases by monitoring our sales orders; supply manages the material flow of all parts into the plants; and supply manages the transportation of finished vehicles to our dealers.
The Centralized Supply ConceptWe realized we had to take a "total systems" approach to the complicated task of delivering materials from many suppliers to individual work stations in our plants. We knew that significant cost savings could be achieved by eliminating redundant inventory and waste in our delivery systems. So we began looking at things like flexible material lines and small-lot containerization to take out non—value-added activities, improve productivity, and reduce costs. The result of these efforts was a "supply part plan," a program designed to bring standardization, simplification, and discipline to all of our parts-delivery activities.
One of the first things we did under the plan was to reduce the amount of inventory taking up floor space in our plants, waiting to be applied one piece at a time to new vehicles coming down each assembly line. By reducing material lot sizes by an average of 50 percent and sequencing and delivering parts more efficiently, we were able to reduce lineside inventory by 75 percent. This, in turn, allowed us to return on average 52 percent of lineside floor space to manufacturing. At the same time, we reduced our "walk time" by more than 50 percent. This is the amount of time that line operators spend walking back and forth between their individual supply racks and the assembly line.
Now we're going to the next step: inviting our suppliers into our plants for what we call "lean production workshops." The idea is to bring together their people and our people to "lean out" the entire material-flow process from the supplier to the operator on the line. As we do, we expect to eliminate even more inventory and waste, free up more floor space, improve material handling, and create prototype systems that can be used elsewhere in the company.
We've been enjoying some success with this concept at our minivan plant in Windsor, Ontario. Two of our suppliers, the Becker Group and Textron, build body components for the Dodge and Plymouth minivans assembled at Windsor. In the past, four plants shipped parts separately to Windsor—at different times, by different carriers, and in different containers. Just taking those parts out of bulk-shipped batches and sequencing them for assembly consumed 20,000 square feet of floor space.
Now, three of those plants will be shipping to the fourth, which will sequence them for just-in-time delivery to us. The parts will be received at Windsor in frequent, small-lot deliveries, using one carrier and one standard container design. At our plant, we'll gain almost 5,000 feet in usable floor space, eliminate double handling, and use two fewer people per shift. We'll also save by paying Becker as a single-source supplier. (Exhibit 7 contrasts the old material-flow operation with the new.)
When we added and subtracted everything, we realized a net system savings of almost half-a-million dollars—just from this one lean production workshop.
Of course, there are opportunities for even greater savings downstream through continuous-improvement exercises. In fact, we're already planning similar workshops to rethink the way we supply our plants with other components ranging from carpeting and side moldings to axles and instrument panels.
Supplier Role in Competitive TeardownAnother way we work with suppliers is through our competitive "teardown" program. Essentially, this entails taking our competitors' products apart, piece by piece, to learn how they build them—and how much they spend doing it. Other automakers do the same thing, but Chrysler is the only one that invites suppliers to be part of the process.
To understand this process, think in terms of finally satisfying your curiosity about how your house was built. First, you would invite your builder over, and the two of you would start taking the house apart, piece by piece. Along the way, you'd make notes on how everything was built, estimate how much each part cost, and place similar components—like the windows—in nice, neat stacks. Then, if you were doing it our way, the two of you would go next door and do the same thing to your neighbor's house!
That's essentially what we did last year when we invited 81 suppliers to join us in taking apart a competitor's minivan, piece by piece. As we did, we asked the suppliers to look for opportunities to improve our minivans, and to submit SCORE proposals to detail their ideas. Then we invited them back for a second session to review the feasibility of their proposals and to develop even more SCORE ideas.
Exhibit 8 gives the results: A total of 47 SCORE proposals were submitted that had the potential to reduce our costs by more than $30 million. Along the way, we also learned that our minivan enjoys a manufacturing cost advantage of almost $500 per unit over their minivan—another reason to work closely with the suppliers who make the parts of your products.
One of the best examples of the Extended Enterprise in action is the new Plymouth Prowler—our wild-and-crazy, two-seat, rear-wheel-drive retro-roadster that went on sale in the fall of 1997. When we exhibited the Prowler as a concept car at the Detroit auto show five years ago, our phones began ringing off the hook. The calls came not just from people who love cars, but from many of our suppliers who wanted to help us put our new concept into production. Today, thanks to the relationships we've established through the Extended Enterprise, our suppliers understand that we're serious about pushing the envelope in product development. They also know that no other car company would—or could—build a car like the Prowler.
At the same time, though, we also knew that we couldn't build it without their commitment. Why? Because Prowler isn't just another pretty face in Chrysler's new product lineup; it's also a rolling test-bed for new automotive applications of materials like magnesium and aluminum. Nearly all of the body components—including the hood, doors, hood side panels, and deck lid—are stamped from aluminum alloy. This helps us take weight out of the car, improve fuel economy, and explore the use of lightweight materials for our other cars and trucks.
Many of the Prowler's smaller components also are made from lightweight materials, like the aluminum rotor on the Prowler's front suspension that was designed by Indy car racing specialists. Thanks to people like them and the many suppliers who've been enthusiastically supporting this project, we can really begin to explore specialized material applications and low-volume tooling. And we can use that knowledge to build other vehicles that might become signature cars for certain brands and certain price classes.
The Prowler also is a good example of the effectiveness of our target costing process. When we began to get serious about building this car, we went to our suppliers and told them we couldn't afford to do it for more than $75 million—which is really pocket change in the new-car development business. We divided the $75 million by all of the components in the car and asked the suppliers if they would work with us.
Today, thanks to the willingness of many people inside and outside of Chrysler to explore new concepts and take some risks, we're building one of the most exciting new cars to come out of Detroit in a long time. And consumers can expect to see more bold, even controversial, cars like the Prowler from Chrysler in the years ahead. These cars are made possible not just by our willingness to take risks on behalf of the customer, but also by our ability to leverage and showcase our suppliers' expertise through exciting new products our customers genuinely love to own and drive.
| Author Information |
| Thomas T. Stallkamp was elected president of Chrysler Corporation in January 1998. Prior to that, he was executive vice president-procurement & supply and general manager of Chrysler's Minivan Operations. |
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