Company Buyers Focus on Quality
Manufacturers are forging tighter relationships with their suppliers, who contribute as much as 60 percent of a product's value. Last in a series.
AT the plant where Polaroid Corporation makes its Impulse brand cameras, engineer Dick Sarvas says quality is the top priority.So one might expect that Polaroid would carefully inspect the quality of the parts from 30 outside suppliers that will go into the final product. Instead, Polaroid pushes the quality-control function onto the suppliers themselves. Defects have to be caught before parts are ever shipped to the Norwood, Mass., plant for assembly. The company helped suppliers install statistical process control (SPC) systems to monitor quality, and suppliers share their quality data with Polaroid. For each camera, the company has four to six "vendor engineers" who work with the suppliers to fix problems. Thus Polaroid has freed itself of the need to inspect 88 percent of the parts it receives, relying instead on "certified" vendors. Before starting the certification process eight years ago, only 40 percent of the parts went straight to stock without inspection, says quality manager George Munroe. Polaroid's case is just one example of how manufacturers in many industries are working more closely with suppliers to boost quality, efficiency, and innovation. "The pendulum has swung away from adversarial relationships" toward long-term cooperation, says Morris Cohen, co-director of the center for manufacturing research at the Wharton School in Philadelphia. As competition heats up in many manufacturing industries, it makes sense for companies to be looking not only at their own operations, but at their outside suppliers, who often account for 50 to 70 percent of the total manufacturing costs of a product, and as much as 60 percent of the total value of a product when it reaches the customer. Polaroid, for example, streamlined the automated portion of its camera production by getting some suppliers to ship parts in trays - for easy access by assembly robots. Professor Cohen, however, is quick to add that supplier-manufacturer relationships are not always the "happy family that you might be led to believe.... The competitive component of the supplier relationship will not disappear." Price is still a key criterion on which vendors are judged, especially in commodity products. This means that in the United States, manufacturers are reluctant to forge ties as close as Japanese companies in the keiretsu system. The keiretsu are conglomerates in which large manufacturers and suppliers are closely linked, with interlocking stock ownership that binds the firms for the long haul. This system contrasts with the short-term contracts, based on competitive bidding, common in America. But factors other than cost are becoming increasingly important to US manufacturers. They are looking for better quality, just-in-time delivery, and technological innovation. And to reap these benefits, they must invest time and money in developing ties with the supplier firms. There is no broad move by US companies toward the cross-ownership of stock shares as in Japan. However, many American firms are picking up on the idea of having a smaller base of suppliers, and working more closely with them. "The most successful organizations have already gone a long way down that path," says David O'Halloran, a senior operations consultant with McKinsey & Co.'s Cleveland office. Motorola, the maker of computer chips and telecommunications equipment, requires all its suppliers to apply for a Malcolm Baldridge National Quality Award. Xerox Corporation cut its supplier base by 80 percent, notes Cohen. In the US, progress has been strongest in the electronics and automotive industries, which "have been under more competitive pressure than other industries," says Mr. O'Halloran. He mentions carmakers such as Ford, General Motors, and Toyota USA, as well as Xerox and Motorola, as companies that have made significant gains. The US aerospace industry, he says, "is far behind," with the exception of Boeing. The industry's supply chain should come under closer scrutiny with the impact of leaner defense budgets. In some industries where profit margins are not under as much pressure - such as pharmaceuticals - or where suppliers are providing commodity materials - such as chemicals - there is not as much incentive to develop long-term partnerships, O'Halloran says. "The more complicated the product, the more benefit there is to going to the new model of partnering," says Charles Leader, a principal with McKinsey who is also based in Cleveland. It is not just a matter of reducing the number of suppliers, but of keeping the best ones, he says. A company's closest ties will be with the suppliers of the most critical parts. In addition to sharing expertise on improving quality, many companies work closely with key suppliers when developing new products. But Mr. Leader says more could be done in this area. He offers an example from the automobile industry: In North America, he says 14 percent of total engineering man-hours are done by suppliers, versus 51 percent in Japan. And Japanese companies have relied on suppliers "without giving away value," he says; only 8 percent of the parts in Japanese cars are proprietary to the supplier, versus 3 percent in North America. Leader says the Big Three US carmakers could follow the Japanese example if their own engineers provided design leadership, and left most of the work with engineers at the supplier firm. By doing this, carmakers would allow their suppliers to develop efficient manufacturing processes as they design their parts; the auto companies would also gain from suppliers' expertise in specific areas. Already, Leader notes, US carmakers are transferring design and manufacturing engineers - precious resources - into procurement positions, where they can foster new products and processes. Ford Motor Company did all its own engineering when it designed a new line of engines that could be built easily on one assembly line, says David Caplan, a company spokesman. But in order to work more closely with suppliers, the company reduced the number of vendors involved in the project to 100, compared to 300 partsmakers for a typical Ford engine.