Getting Ready

Dec. 21, 2004
Your Suppliers -- Regardless of the emphasis, both the technology and human factors are crucial.

Communication and collaboration are the terms bandied about most often when manufacturers decide to strengthen their ties with suppliers en route to adopting a value-chain model. But how these goals are achieved can vary widely. Some companies say technology is key, with the Internet playing a crucial role. Others stress the human factor: face-to-face meetings and clearly delineated expectations, combined with education and, often, a helping hand. American Standard Cos. Inc. falls into the latter category. Several years ago, when it expanded its supplier councils across all its major business units, the company reached out to suppliers with a slick presentation. In dozens of meetings across the country, American Standard execs showed a video in which CEO Emmanuel A. Kampouris explained the new competitive landscape and why American Standard needed to create better working relationships with its suppliers. The company had clear requirements and was prepared to drop any suppliers that couldn't meet them. But at the same time, says Brian Evans, vice president and group controller for plumbing products, the company went to great lengths to demonstrate that "we weren't asking them to do anything that we weren't doing ourselves." A new candor developed, in which the company discussed its own efforts to improve operations, including plant consolidations and layoffs. "We wanted to show them that we weren't simply looking for them to make sacrifices while we did nothing," Evans says. However, American Standard was serious about its expectations, so serious that when the smoke cleared it had cut hundreds of suppliers from its plumbing business alone and many others in air conditioning and the automotive sectors. "But those who made the grade," Evans says, "got a bigger slice of the pie. Smart suppliers want to identify the winners and ride their coattails, and we know that." In fact, American Standard offers some pretty hefty incentives to suppliers that can adapt to its demand-flow technology (DFT) mode of business. The company single-sources whenever possible and guarantees certain purchasing volumes. "We'll ask for greater flexibility as to when we take delivery," Evans says, "but the suppliers know they can count on a certain volume of business from us, so they want to make us happy." (Invented by John Costanza in the 1980s, DFT is a structured, mathematically based approach to manufacturing that begins with customer demand and permeates every aspect of a company's operations.) In addition to guaranteed minimums, American Standard also plays a part in educating its suppliers about its changing business needs. "When you move to a process like demand-flow technology," says David Gleditsch, DFT formalization leader, "you reap the benefits only if it's implemented across the entire value chain, so you need not only to get your own house in order, but to make sure your suppliers follow suit." Toward that end, American Standard has sent more than 300 suppliers for training in DFT. At the same time, many suppliers have responded by moving their operations closer to American Standard facilities or created stockrooms or consignment areas within the company's factories. "We've educated our suppliers so that they can function as extensions of our own manufacturing processes," says Evans. The company also spelled out clear goals for its suppliers, not just on price, but on shipping costs, delivery schedules, and more -- even including annual productivity gains. One of the company's suppliers, St. Louis-based White-Rodgers, a division of Emerson Electric Co., says it's benefiting from its closer ties to American Standard's Trane air-conditioning business. "The term 'partnership' is overused today, but what we've established with Trane is a very valuable relationship," says Jim Price, the White-Rodgers account executive for Trane. "Their goals are our goals, because both companies are focused on growth." Price says the keys to the relationship are mutual respect and open communications at all levels. "No one has to go through a liaison," he explains. "If our engineers need to talk to theirs, we just go right to the source. It facilitates responsiveness when you can talk one-to-one with the responsible party." Price says that as the result of what it has learned from dealing with Trane, his company is beginning to treat its suppliers in a similar fashion, with better communication and sharing of information. American Standard achieved most of this the old-fashioned way, with lots of face time and telephone calls. Executives there say that despite the hype surrounding the Internet, even e-mail can be troublesome, since it is not yet ubiquitous and sometimes different systems have trouble passing different types of information back and forth. The Round Rock, Tex., company isn't technology-shy and is, in fact, exploring the potential of e-commerce, but for now the conference table and the fax machine remain the tools of choice for bringing suppliers deeper into the fold. Not surprisingly, Dell Computer Corp. takes a completely different tack. The company that proved that a manufacturing empire could be built by relying on the same suppliers used by dozens of competitors manages its supplier relationships almost exclusively through cyberspace. In fact, the company's value chain essentially boils down to two Web sites, one for customers and one for suppliers As director of Internet e-commerce for Dell, Lance Van Hooser has responsibility for the latter. "We want to leverage the same direct model we use to serve customers across the entire value chain," he says. "Our goal is to drive as much supplier contact as possible to the Web site, because we can make it easier to deal with us, we can cut costs, and we can increase velocity." The site was launched a year ago and today is the primary mode of communication between Dell and 33 of its largest suppliers, which account for about 90% of Dell's materials. Another three dozen suppliers use the site on a more limited basis. Van Hooser says that the growth of the Web site essentially parallels what many companies go through as they try to move from a rudimentary supply-chain model to a true value-chain environment. Initially the site provided a way to eliminate problems with communication between Dell and its suppliers. "We got enormous volumes of phone calls, e-mail, and faxes," Van Hooser says. "Sometimes we'd answer questions more than once, sometimes we'd miss them, and sometimes we'd send contradictory answers." So the Web provided a vehicle to publish accurate information about product requirements, schedules, logistics, and other facets of the business. "The flow of information was one-way," Van Hooser says, "but then we began asking suppliers to reciprocate and push information from their internal systems to Dell audiences. So we had connections between various intranets." In the third phase, Dell looked to the Web to foster true collaboration via what Van Hooser terms "business intelligence." That meant expanding the focus from static or lagging information, such as preferred methods of shipment, to leading information, such as line reject rates. "We want to do things like shared product development and pipeline visibility, where suppliers can see inventory levels across the entire value chain," he says. Van Hooser says that, although it's relatively easy to tap the Web for basic functionality such as publishing important data or giving employees access to another company's intranet site, the final phase of true Web-enabled collaboration represents a big leap. "In that world it's all about making sure that your internal business processes are serving your business goals," he explains, "and the same is true for your suppliers. If you have a broken internal process and you provide this ability to see the entire value chain via the Internet, it's risky. The problems are out there for all to see." Therefore, he says, an appetite for continuous change is essential if a company hopes to put the Internet at the center of its value web. It also is important to trust the technology. Van Hooser stresses that the Internet is not an additional means of sharing information--it's the only means. "We shut off the other modes of communication," he says. "The Internet is it." Dell is now in a pilot program to push the massive amounts of customer data it collects back to its key suppliers. "I can't say much about it," Van Hooser notes, "other than to say that there is a concept we call a 'clean demand signal' that guides just what customer information we pass through the channel back to suppliers. You have to have a level of trust to do that, and that takes time." If all this sounds too high-tech for your organization, take heart. Even executives who sell the software that makes collaboration across a value chain viable admit that technology is only one piece of the puzzle. "There's no doubt that technology accounts for only about 10% of the entire effort to adopt a value-chain model," says Andrew White, vice president of product strategy for Atlanta-based Logility Inc., a vendor of workflow and related software products that facilitate value-chain collaboration. The other 90%, he says, concerns cultural issues, which are difficult enough to sort through in one organization but vastly more complex when many organizations are attempting to work together. White points to the efforts of an organization called the Collaborative Planning, Forecasting & Replenishment Committee, a group of manufacturers and retailers who are working on methods of collaboration and process-sharing throughout the value chain. The group's efforts focus largely around a trading-partner framework and operating process that starts with consumers and works backward. Trading partners manage the development of a single shared forecast of consumer demand that drives planning across the value chain and jointly commit to the shared forecast through risk sharing in the removal of supply-process constraints. Efforts to remove constraints include an emphasis on make-to-order systems and dynamic inter-enterprise scheduling. The group serves as a conduit to best-practice information, not to mention providing a host of instant colleagues (for more information, visit J. Michael Hagan, chairman and CEO of Furon Co. a manufacturer of specialty polymer products based in Laguna Niguel, Calif., says that his company relies heavily on the Internet and intranet connections to facilitate a number of collaborative efforts with both suppliers and customers, but "the important thing is to reduce your supplier base, identify the companies you work best with, and then look at what else you can do to create better solutions together." Jim Uchneat, a director with Benchmarking Partners Inc. in Boston, says that one important aspect in the manufacturer-supplier relationship is "to share not just data, but analysis. It's one thing to push lots of numbers through a pipeline, but another to sit down and agree on what it all means." Of course, any move toward more significant collaboration with suppliers, no matter how democratic, also will involve issues of power. When American Standard launched its road show, it wasn't asking for new approaches to business; it was demanding them. And Dell's Van Hooser admits that "our size and our role as a systems integrator makes us powerful, as does our direct reach to customers," but he says that Dell is no more demanding of its suppliers than other top-tier computer makers. Both companies stress that they give suppliers a chance not only to voice concerns, but to describe ways that they think the relationship can be improved. While executives agree that it's usually the larger companies that make the first moves in transforming a traditional supply chain into a value chain, they stress that smaller companies don't have to be passive. Often it's less a case of pure clout than of who has the vision and who can persuade other companies that mutual interest dictates a change in working relationships. "Ultimately it's the customer who has power," says Vijay Govindarajan, professor of international business at Dartmouth College's Tuck School of Business. "And that will accelerate as more consumers use the Internet to research purchases and to shop for price. Companies that understand this and work together to meet that more sophisticated demand will be the ones that succeed." That's not to say that a conference call, a handshake, and the establishment of new procedures and network connections will solve everything. What about capacity? What happens if, for the sake of working together, one partner has to produce at a level it considers below optimum? The beauty of traditional manufacturing, in part, is the simplicity of cranking out as much product as possible and pushing it through the pipeline. Would any member of a value chain be willing to underproduce to maintain equilibrium? "It all depends on what you want to optimize," says James E. Morehouse, a consultant with A.T. Kearney Inc. in Chicago. "Sure, if I'm optimizing a single factory, I'll conveniently ignore what's upstream and downstream. But if I'm optimizing a process, I look beyond we-vs-them." Morehouse points out that today a factory running at full tilt nonetheless spends significant time responding to exceptions, be they break-ins, short runs, or what have you. In a value chain, where you can see downstream and gauge demand, these exceptions can be drastically cut. "You may be far more profitable running at 80% capacity in that situation," he says, "than running at 100% in a typical scenario." Hugh Hoffman, process owner of chinaware order fulfillment at American Standard, agrees. "Before we reorganized around processes," he says, "I was the business-unit manager of a plant in Ohio. At that time, each plant acted like its own profit center, and there was a lot of rivalry." Hoffman points out that what was good for one plant might not have been good for the company as a whole. In a value-chain world, the same concept holds true: each member benefits most by doing what's best for the entire chain. Group interest and self-interest become indistinguishable. And ultimately how you produce may be less important than what you produce, given what you and your suppliers now know about market demand and how best to meet it. "The degree to which better collaboration leads to better solutions," says Furon's Hagan, can't be underestimated. Each partner brings their own expertise and ideas to the table. That's what makes this value chain idea so powerful."

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