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Pruning The Supply Chain

Kevin Mixer, research director at AMR Research, is spreading the word about "sustainable supplier structure". In an Oct. 12, Industry Highlight, Kevin discusses recent actions taken by the automotive market to change supply chains by consolidating vendors. The recent announcement by Ford to cut its production supply base by as much as 70% to hit a target of 700 suppliers down from 2,500 is a recent example of this new strategy.

Mixer explains, "Ford's news is not surprising, with production components being one of the largest and most influential factors on manufacturers' bottom line. It also comes as forecasts for Western Europe and North America show demand falling below past industry averages. With the continued expansion of global manufacturing capacity, this is becoming a permanent shift in the market that demands manufacturers develop long-range plans."

Other companies have used this strategy to improve responsiveness, flexibility, improve quality and of course reduce costs. Mixer cites the following examples:

  • Honeywell's (formerly AlliedSignal) pruned its supply base to fewer than 2,000 in 1997 from 10,000 in 1992. Plans are now to shrink the supply base even further to 1,500 in the next few years. AlliedSignal's automotive sector identified $2 million in savings in 1993 from these efforts.
  • In 1995, AMR, the parent company of American Airlines, had 7,200 suppliers and launched an aggressive five-year plan to slash the supply base 70%. The result is more than $250 million in savings.
  • Between 1981 and 1985, Xerox reduced its supplier base down to 400 from 5,000. The results; net product costs dropped 10% per year. The number of incoming materials that failed inbound quality controls was reduced 93%. New product development time and cost were cut in half, while production lead times were reduced to 18 weeks from 52 weeks.
  • DaimlerChrysler, then just Chrysler, reduced its production supplier base to 1,114 from 2,500 companies by 1993, in a four-year supply base consolidation initiative. Profits per vehicle increased to $2,000 by the mid-1990s from approximately $250 in the 1980s and a sourcing program that has more than 90% of Chrysler's purchasing volume locked with 150 suppliers.
  • In 1993, IBM had about 4,900 production suppliers. By 1998, IBM had moved more than 85% of its $17 billion in production purchases to 50 main suppliers. Commodity teams leveraged IBM's purchasing power worldwide to reduce sourcing parts prices 5% to 10% below industry averages. Leveraging has had a big impact on the bottom line, with savings in 1998 of over $1.5 billion on $21 billion.

AMR Research

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