Alex KESSELER
During the 1980's many European car manufacturers changed their supplier relationships. Persisting importance of costs and an increased importance of quality, delays of delivery and delays of product development led to the introduction of a closer relationship between suppliers and buyers, often called supplier partnership. American and European car manufacturers tried to implement an approach which was based on supplier relations observed in Japan. Ford in the US for example identified the involvement of suppliers in the early product planning stage as a major success factor of a car development project in the mid 80's Renault in Europe had a positive experience with a similar approach during the Twingo development late in the 80's 1 and increased again integration of suppliers during the recent Megane project 2. The needs of car manufacturers drive the evolution of supplier relationships. The direction of this evolution seems to be clearly identified. Car manufacturers ask for supplier partnership and increasingly integrate suppliers in their product development processes 3. Therefore suppliers have to adapt to changes in demand and may have to change their organization or their development methods. But how do suppliers actually modify their organization and how do they co-operate with car manufacturers ? What problems emerge with these new relationship, what are the critical issues and where lie the limits to collaboration ? These questions have not been discussed adequately in literature.
This study of a first tier, European supplier was conducted in 1995. Two new product development projects have been analysed. The products, with nearly similar functions, but developed for two different car manufacturers, can be characterised as subsystems, entities of assembled parts fulfilling a discrete function. The development of the subsystem requires a high level of technical know-how and efficient co-operation of supplier and buyer to assure a successful integration into the cars.
These particular development projects were chosen for analysis because of a negative appreciation of the results, compared to other projects, by both, the supplier and the customers. Observed important difficulties during the development projects facilitate the identification of lags of adaptation to the changed demand of co-operation of car manufacturers. In addition, critical issues of development projects which require intense co-operation of supplier and car manufacturer should be identified more easily.
In the first part of the article, the partnership approach is explained. The historical background of the emergence of such relationships is presented briefly. Then follows a review of literature on today's characteristics of industrial co-operation. In the second part, the analysis of the two new product development projects is presented. The results of this analysis are discussed and finally, the critical issues and constraints limiting closer co-operation during product development are presented.
At the end of the 1980's US and European automotive companies started to modify their supplier management methods. The triangle “quality-cost-delay” was identified by all European car manufacturers as a major target for successful business. Quality had become a strategic objective 5. Costs remained a key parameter of success. The reduction of the product development cycle time had become essential to remain competitive. Again, the car manufacturers focused on their relations with suppliers. This time an intense co-operation, rather than competition, with suppliers was chosen by some European car manufacturers as a path to follow.
The importance of supplier relations was also increasing due to three important, related trends. First, the level of vertical integration of car manufactures was continuously decreasing 6. Most car manufacturers were concentrating on their core business : Designing and assembling cars. Still many parts were produced in-house, but an increasing number of parts and subsystems were purchased from suppliers. Bought, or in automotive jargon “outsourced”, parts amounted to more than 50% of the unit value of a car. Second, there was an increasing utilisation of new, complex technologies in cars. The integration of electronic systems illustrates this trend. Third, the implementation of concurrent engineering : Design cycle time reduction and early integration of all participants in a development project made closer supplier relations necessary 7.
Japanese car manufacturers had already achieved an intense co-operation with their suppliers, a factor which had been identified as a major reason for their success 8. In the US and in Europe, companies began to use Japanese supplier relationships as a model for their own relationships 9. Moreover leading quality practitioners in the US recommended closer supplier relationships. Deming even suggested buying similar parts from but one supplier, so called single sourcing 10, instead of allocating supply shares to several suppliers as was the tradition. The term “supplier partnership” was born indicating a close, co-operational relationship with shared responsibility. Today supplier partnership is part of the strategic plan of most car manufacturers. This approach to supplier management was also directly transferred to Europe, especially in GB, through Japanese transplants.
In a recent survey Helper and Sako 11found a clear and continuing trend towards supplier partnership. In 1993, 30% more of European car manufacturers than in 1989, said they would help their supplier to match a competitor's better offer. The number of car manufacturers, who would not change a supplier when they received a better offer from a supplier competing with the in-business supplier during a current contract decreased by nearly 10% in comparison to 1989.
Supplier partnership is requested by some car manufacturers in product development, but in the production phase even more car manufacturers demand a partnership. In particular closer co-operation in logistics, Just-in-time (JIT) and Electronic Data Interchange (EDI), is demanded. The car manufacturer Volkswagen (VW) even started the construction of a factory in Brazil, where suppliers will be responsible for production and final assembly within the VW factory 12. The trend towards a closer co-operation of car manufacturers and suppliers appears to continue to increase and even core activities of car manufacturers, like final assembly, might be “outsourced” in the future.
The demand of the car manufacturers is driving the evolution of car suppliers as described towards closer co-operation. A number of European car manufacturers have asked for the creation of partnership relations with their suppliers. But what exactly is a supplier partnership ?
A short, but impractical definition of the partnership approach is provided by the French public standardisation institute, the AFNOR 13 : “Supplier partnership is a state of mind enabling the creation of privileged relationships, based on research with common objectives at mid and long term. The relationship fosters at conditions assuring reciprocal advantages” 14.
A more detailed definition and description is provided by Lamming 15. A major characteristic is the creation of a tier structure in the supply chain. This structure provides the “optimum combination of complementary assets in subcontracting firms”. First tier suppliers are supposed to have solid, long term relationships to their customers. However, these first tier suppliers must constantly provide better service. Being a first tier supplier is not assured by a right, but by a constant improvement of services and products. The competition in the supply chain is therefore dynamic and fierce. First tier suppliers must intensely co-operate with car manufacturers and out-perform than other potential suppliers.
The sourcing decisions are not made based solely on competitive bidding but are based on the performance of suppliers, past experience, and on costs. The car manufacturer needs to know that he is still paying a very low price. The prices are changed annually with planned cost reductions. An intense exchange of information between the partners takes place. All kinds of information is exchanged beginning with delivery and product details, including detailed cost information.
New product developments are planned jointly to obtain high quality products. This implies an early involvement of suppliers in the product development process. Features of this earlier supplier involvement are “black” or “grey box” development. “Black box” development is characterised by limited product specification provided by the customer instead of complete blueprints. Only product performance and interface details are specified and the supplier has the freedom of choice of product and production technologies. According to Lamming, the supplier partnership approach leads to a high level of pressure on both partners due to the complexity of the relationship.
The factors driving the emergence of the supplier partnership approach in the US and in Europe have an important impact on product development. A substantial improvement of quality and product development cycle time reduction can be obtained through co-operation with the supplier in the product development process. Yet, very little has been written about the changes required during the product development phase to obtain these improvements.
In the US and in Japan, Liker observed black or grey box sourcing as a part of product development in a partnership approach 16. He identified three distinct characteristics of black-box sourcing :
These criteria are related. The early involvement of the supplier and clear communication enable the supplier to take extensive responsibility for the success of the development. The interface with the supplier is not only established by the purchasing division as in traditional supplier relations, but by different departments of the car manufacturer and the supplier. A complex supplier-manufacturer interface is created.
The co-operation is called grey box sourcing, rather than black box, when the car manufacturer keeps a part of the responsibility of the development project of the supplied part 17
In Europe an in depth analysis of a recent car development project has been made by Midler 18. He analysed the Renault Twingo case and identified different criteria of product development in a partnership approach. He defined a mode of co-operation of the car manufacturer and a supplier called “co-design” 19. The characteristics of the co-design are :
Garel characterised the choice of supplier in a partnership context as not based on the lowest offer, but on the "best" offer 20. He added that the buyer helps the supplier to acquire new competencies based on the co-design with the partner. A closer connection between technical development and remuneration of development activities is another characteristic of supplier partnership.
Laigle provided further characteristics of a partnership approach in product development observed in France 21. She identified a change of the period of time covered by supply contracts. A supply contract signed, using a partnership approach, covers all product life cycle phases from the study phase until industrialisation. She characterises the role of the manufacturer as monitoring, following the project, and making recommendations. A high level of independence is granted to the supplier, but the car manufacturer supervises product development. On the other hand the supplier also becomes a participant in the development project of the car manufacturer.
An essential question, however, which has not yet been discussed in literature is the way suppliers adapt to this changed demand of co-operation. What are the problems and difficulties suppliers have to face ? Where are the limits ? Two development projects of a supplier for two car manufacturers in Europe have been analysed in depth. Both cases meet certain criteria of partnership product development.
The project that has been analysed is based on a co-operation of a first tier supplier, called “Newsystems” and a car manufacturer in Europe, called “Bluecar”. The supplier is a multi-product and multi car-manufacturer supplier.
For several years the car manufacturer Bluecar had been working to develop a policy for supplier partnerships. A list of criteria for the selection of suppliers, including a partnership approach as a key element, had been internally and externally published. Results of the implementation of the partnership approach had been observed. The total number of suppliers had decreased, while the level of vertical integration did not increase. At the beginning of this research Bluecar had begun to create a partnership relationship with the supplier Newsystems.
The developed product is an automotive subsystem. A subsystem is a unit of assembled parts, that can be installed intact and fulfils a complete function of the car. The design and production of the subsystem require a high level of technology and know-how.
The development project started in the beginning of the 90's and was completed after three years. The subsystem development project was linked to a car development project. The subsystem had to be developed, tested, validated and produced in large scale before the start of the assembly of the new car model.
The co-operation in the development of the subsystem between the supplier Newsystems and the car manufacturer Bluecar can be divided into two major phases : (1) The phase before allocation of the development project to a supplier, called the preproject phase, and (2) the phase after the allocation, called project phase.
The co-operation of the car manufacturer Bluecar and the supplier had been established several years before the beginning of the car development project. The subsystem would be specifically designed for a new car. Newsystems had already successfully completed new product development projects for Bluecar and their common business was increasing. This experience had created a certain bi-lateral knowledge of technical capacities, organizations and personnel.
During the preproject phase Bluecar began to create a product concept. This product concept was developed based on marketing and engineering knowledge of Bluecar. Information about future market trends or of new technological developments was continuously provided by Newsystems and by other potential suppliers of comparable subsystems. The technological evolution in the field was fast. Bluecar gets most of its information from the “in-business” suppliers. In-business suppliers are those suppliers which at the moment of reference are developing or selling products to the car manufacturer. However, the product requirements had been established by the Bluecar without direct assistance of any supplier.
The established description of the future product can be characterised as a detailed specification of functions including a description of interfaces to other systems and parts of the future car. This product description had been sent by Bluecar to about ten different potential suppliers accompanied by a letter requesting proposals. Potential suppliers are the in-business suppliers of comparable products and other big automotive suppliers. These requests for proposal did not include a target price.
The reception of the request for proposal including general product characteristics of the subsystem did not surprise the supplier. Frequent communication of supplier and buyer was the norm for several years. In order to elaborate the best proposal, a small team at Newsystems was created. Members of this team already had experience with preceding development projects and negotiations with Bluecar. The team included members of Newsystems' development department, the sales department and cost calculation department. The supplier's sales department managed the creation of the proposal, which had to be prepared very carefully. If accepted by the car manufacturer, the proposal is the document of reference. The proposal is part of the contract, including technical specifications of the product and prices. The car manufacturer granted a period of one month to elaborate this offer. In time, the offer was sent to Bluecar.
The car manufacturer's selection of Newsystems was based of a number of different criteria developed by different divisions. The divisions participating in the decision making process were mainly
After a decision making process of several months the supplier Newsystems was chosen as single developer and supplier for the subsystem.
The contract was established. The contract is not a document that is precisely negotiated between both parties, but a simple letter of acceptation of the proposal made by the supplier, which includes an extensive description of technical data, design aspects and prices. Legally the contract was only signed for a short term, but informally product life time supply was the objective for both business partners.
The costs of development were to be amortised in the product unit price. Therefore, the supplier assumes a part of the commercial risk of the car. In case of low sales, the supplier might loose money, but in case of high sales the profit is shared.
The supplier was in charge of the development project. Newsystems' responsibility is extended over all product phases, including design, verification, prototype and production. Nevertheless, during these development stages, representations of the future product were presented to the manufacturer for verification and improvement proposals. This supplier - manufacturer co-operation includes development, marketing and commercial divisions.
During the development project the supplier and the manufacturer made proposals for modifications in the product design. Three different types of reasons for product modifications have been observed. (1) A non-conformance of the product to fixed and quantified specifications, (2) a non-conformance to implicit, but not quantified specifications, and (3) an evolution of customer's demand. Modifications are discussed before application and approved by both development partners. An objective of the early integration of the supplier in the development process, is the resolution of non-conformities and modifications of the demand during early project phases. Modifications in early product phases are easier to make and are cheaper. Moreover, the modifications of the subsystem might imply consequences for the design of other parts of the car. Some problems were observed due to late modifications of the subsystem's design.
An important problem occurred due to the different opinions within Bluecar about early prototypes of the product. All participating divisions of Bluecar approved early prototypes of the product. After several months of further development, a division of Bluecar totally rejected the product, while other divisions of the manufacturer accepted it. The rejected product was conformed to explicit technical specifications. A characteristic of the product, an interface, which had not been clearly specified was not in accord with the expectations of the division of Bluecar. The development of the product had to be stopped and a completely new product had to be developed. Voluntary, the car manufacturer agreed to defray costs for the first development trial, because earlier accepted prototypes had already showed the characteristic that led to the rejection of the product.
The existence of a high level of knowledge about products like the subsystem on the side of the car manufacturer made it possible to obtain a high level of understanding and communication between the manufacturer and the supplier. Newsystems' engineers did not directly participate in the project team of the car development. Therefore the existence of a co-ordinator within the design division at the car manufacturer was necessary. The non-integration of engineers of the supplier in the project team was based on a low impact of the modifications of the developed subsystem on other parts of the car. The redesigned product passed without problems in the production phase and only very few modifications had to be done since market introduction of the car.
After several months of sales of the car, another problem emerged due to a functional characteristic of the subsystem, which had not been clearly specified in product specifications. A precise description of this characteristic would have been very difficult. This problem was considered by the car manufacturer as important and the supplier agreed. Bluecar asked for a solution of the problem. This was not possible with minor product modifications. The product was based on a technology, which made it impossible to significantly improve the subsystem. Bluecar asked therefore for a product replacement and the supplier agreed although such replacement would resume significant additional investments. Newsystems' agreement took several weeks. The sales division of the supplier had to convince other divisions of the necessity to replace a product, which had met all specifications. This low reactivity of Newsystems created a potential conflict with the car manufacturer. The supplier had to satisfy this demand, or risk negative consequences in the long term. The level of pressure on the supplier was therefore high. The investment in product replacement was considered as an investment in a long-term relationship.
The same supplier Newsystems as in the first development project co-operates with another car manufacturer in Europe, called “Greencar”. Newsystems had already developed products for Greencar over several years. The supplier was already producing different products for the car manufacturer. Newsystems had mainly positive experience with these development projects.
The developed product was quite similar to the subsystem developed for the manufacturer Bluecar in terms of technical performance requirements. One major difference between the products was a higher level of standardisation of the subsystem for Greencar. This subsystem would be installed not only in one car model, but in different types. Development started in the beginning of the 90's and was completed in three years.
Several years before the introduction of the subsystem into the cars of Greencar, engineers of the Greencar asked salespeople and engineers of the supplier Newsystems about new developments of the supplier and general market trends. This information was provided during regular meetings about currently supplied products. Other in-business suppliers were also contacted regarding these questions.
The product creation process of the new generation of subsystems began in the development division of Greencar. Engineers discussed new developments which could be used in a new generation of the subsystem and created different product scenarios. Old product specifications were taken and updated with different new characteristics, but only a low level of detail. A certain number of potential products were defined. Greencar's engineers calculated approximate prices of these potential products based on information provided by suppliers. In co-operation with the development, the marketing, and the purchasing department, one product configuration was selected. This choice did not include a choice of a supplier. Only general product specifications have been defined, including one new product feature.
Subsequently, a list of technical specifications was established by Greencar. This description was very detailed. All functions, dimensions, and interfaces were specified. Compared to Bluecar, these specifications were more detailed.
Then specifications were sent to about ten potential suppliers and proposals were requested back within three weeks. Target prices were not included in the request for proposals. Greencar indicated that offers had to be 100% in accord with the technical specifications.
Newsystems created a small team to elaborate a proposal. Members of this team already had experience with preceding development projects and negotiations with Greencar. The team included members of the development department, sales department and cost calculation department. The future product and exact product specifications were taken into account. Different elements of this proposal had to be evaluated in the relatively short time available : Resources for the development and production, costs for purchased goods over the following years, etc. Moreover Newsystems had to make sure the product development would conform to their product strategy. Several loops of verification and validation of the proposal had to be made before the proposal could be sent, in time to Greencar.
Similar to the development for Bluecar, the supplier created a cross-functional development team, as soon as the decision of Greencar was communicated. Exact specifications were elaborated and first prototypes were built as soon as possible and sent to Greencar for testing.
After several months of product development and approval of prototypes, the manufacturer asked for the re-negotiation of the product prices. Without a change of product specifications, the product sales price was significantly reduced. The buyer used its purchasing power to squeeze the supplier ! Moreover, a second supplier had been granted a share of the total quantity of planned products. Product specifications of the subsystem to be produced by the second supplier were identical to the subsystem developed by Newsystems. The decrease of the share of the product causes a loss of scale effects of mass production. Product development costs are amortised over product units. The return on the investment “development” will therefore be significantly lower than expected and calculated by the supplier. Until the moment of re-negotiation of the product price, the supplier had already made important investments in product development. These investment however would have been sunk costs if the supplier decided to stop business with Greencar. Moreover, future business of Newsystems with Greencar could have been endangered.
This was a new experience for the supplier. Newsystems could not simply pass on the price reduction to its sub-suppliers. Additionally, costs for development and production were already continuously being reduced and could not absorb the high price reduction. However, product development efforts continued without modification.
During the development, quality targets for the final product were increased three times. These increases were demanded by the car manufacturer. Even during late development phases the quality target was increased, whereas many authors agree that the real final product quality level is largely determined during early product development phases 23.
An important problem occurred during product development. A key component of the product could not be supplied by a sub-supplier in-time. This key component, a microprocessor, was absolutely necessary to progress in development and testing, including the new technical feature of the subsystem. The key component itself was a newly developed product of the sub-supplier. This sub-supplier missed the start of delivery date of the microprocessor by several months. Consequences for the subsystem development project of the automotive supplier were serious : The total development project was delayed significantly.
During this phase of the subsystem development project, the co-operation between the car manufacturer, the first tier supplier and the second tier supplier was intense. The first tier supplier explained the difficult situation to the car manufacturer, which accepted a modification of the project schedule. The car manufacturer also intensified its testing activities of prototypes in order to rapidly provide information to the first tier supplier.
Finally the subsystem was supplied to Greencar within the negotiated, extended delay of delivery. A negative consequence of the late supply of the key component was an initial product quality level, which was below the forecast level.
The increase of quality targets for the subsystem led to a problem. The supplier had problems meeting these targets. After several months of supply of the subsystem, the car manufacturer decided to reduce the share of the supplier and to increase the share of the parallel supplier. Hence, the perception of the second analysed project is negative, too.
In regard to possible innovation, significant differences between Bluecar and Greencar were observed. Both car manufacturers defined major product characteristics before requesting proposals of suppliers. New technologies or product features were therefore defined several years before the market introduction of the subsystem and the cars. This method had an important disadvantage : In a field of fast technical evolution, such as the subsystem, technology could become rapidly out-of-date rapidly during product life of the developed subsystem. Bluecar specified less product characteristics, which made it possible to integrate new features during the product creation phase. One the other hand Greencar had already frozen product specifications at this early stage and innovation was almost impossible.
Analysis reveals however a problem in terms of co-operation with fewer frozen specifications in the case of co-operation of Newsystems with Bluecar. The development project had to be interrupted after rejection of a prototype by a division of Bluecar. The prototype conformed to all explicitly stated product specifications, but a characteristic of the product which had not been clearly specified was not according to the expectations of Bluecar. A high level of co-operation of Newsystems and Bluecar was necessary to resolve the situation. Comparable difficult situations might always occur during development projects for two reasons : (1) The customer does not always exactly know what he wants and he might not be able to express his demand precisely (Example : "The seats of the new car have to be comfortable"). Customer's demand is therefore dynamic during a development project and changes. (2) The supplier might not always be able to interpret correctly what the customer wants.
The choice of suppliers in both cases was based on competition between different suppliers. The criteria of choice were quite similar in both cases. The price was very important, but also past experiences with the supplier and a panel strategy were also major decision criteria. The supplier selection method was therefore more traditional than partnerial in both cases.
Both subsystems were developed by the supplier. The car manufacturer's role was the testing and evaluating of prototypes. Some minor modifications on interface requirements were made by the car manufacturers. Changes were discussed with the suppliers and satisfying solutions were developed. The communication between business partners was open. The knowledge about the partner's organization through preceding development projects was advantageous. Some strengths and weakness of the organization of the manufacturer and the organization of the supplier were known mutually.
During the development project both car manufacturers showed different behaviour. Bluecar continued to co-operate with the supplier as initially agreed, whereas Greencar squeezed the supplier by an important price reduction without any changes in the product and went on to select a parallel supplier. This change in the relationship was not a punishment for eventual bad performance of the supplier, but part of a strategy. The problem with the sub-supplier emerged after the end of negotiations. This problem, however, had consequences on the product quality level, which was below predictions. Greencar reacted with a reduction of the supplier share for the supplier Newsystems and an increase of parallel supplier's share. This strategy is contradictory to partnership relations, but shows the importance of the purchasing power of a car manufacturer. The supplier cannot develop a relationship based on trust with the car manufacturer.
The buyer Bluecar on the other hand tried to create a closer relationship : Responsibility for the development of the subsystem was given to one single supplier and this decision was not modified ; the supplier had more autonomy in the definition of detailed product characteristics which the manufacturer had not defined during early stages ; the car manufacturer paid directly for an early development effort, which he decided to abandon ; the emerged quality problem was discussed between the supplier and the manufacturer and intense testing was done. This testing included testing of the complete vehicle, including connected subsystems. As a completely satisfying solution could not be obtained, the supplier agreed to replace the product and to develop a new product.
The project manager at Newsystems responsible for the development project for Greencar was new to the business and had little experience with project management. This led to major problems, when difficulties occurred. Specific knowledge of the car manufacturer, however, existed in the project team through team members who already worked on projects for this manufacturer.
Car manufacturer's demand for co-operation was higher in the case of Bluecar, because supplier's involvement in the design of the subsystem was greater. This revealed a problem concerning organizational interfaces. Due to the intensified contact of two companies and a co-design effort, the number of interfaces was multiplied. The co-operation of members of different departments of two companies, the complexity of both organizations and on the other hand a low level of knowledge of the business partner created a necessity for learning about the other and the adaptation to partner specific requirements.
After the end of the development project with Bluecar, Newsystems created a dedicated organizational unit for this car manufacturer. This organizational unit facilitates a closer co-operation between supplier and buyer. The increased complexity of the “interface” of supplier and buyer and the increased flow of information through this interface created a need for such restructuring of the supplier's organization. Cross-functional management is reinforced in the new organization. Such reinforced cross functional management shall at the same time increase the orientation towards customers within the organization of the supplier.
Do manufacturers have different supplier management strategies ? The behaviour of the car manufacturers regarding product price definition and the way of problem solving provides evidence in the affirmative. Greencar significantly reduced prices, while the supplier already had irreversibly frozen product cost determining parameters. Moreover, the product quantity was decreased through the nomination of a parallel supplier. Quality problems have not been analysed jointly, but suppliers share was simply reduced as punishment. These are not elements of a close, partnerial relationship in product development. The second hypothesis regarding a different level of integration of the subsystem into the car appears true, too. One subsystem development was linked to the development of a specific car and had to be specifically designed for that car. The other subsystem was designed to standardised but detailed requirements of the manufacturer for several car models. The actual differences between both products in terms of integration in the vehicles were small. Explaining the different behaviour of a car manufacturer using this argument is not sufficient. The hypothesis of a different supplier management strategy appears correct. Not all car manufacturers want a closer supplier relationship for subsystem development projects.
Why does one car manufacturer have a different strategy, not directed towards a closer supplier relationship, while this approach is adapted by a number of other manufacturers and is especially applied very successfully in Japan ? Japanese supplier relationships have been used as a model and are at the origin of supplier partnership. This model, however, might not be simply transferable to Europe or the US due to the specific economic environment in Japan. A difference between the Japanese and the European partnership model exists due to different economic framework and evolutions and different cultures 24. The economic framework in Japan are highly influenced by different company networks. Informal networks, which are managed by the Japanese Ministry of Trade and Industry (MITI), enable Japanese companies to co-ordinate development efforts between manufacturers and suppliers. Financial company networks, the keiretsu, strongly relate suppliers to car manufacturers who own shares or belong to a same financial group. A keiretsu is defined as a group of companies, which are horizontally connected and vertically integrated 25. These relations have been characterised as “ clan relations ” or “ obligation contraction ” and follow neither hierarchical nor market principles 26. Companies that are financially related, will easier tend to co-operate closely than totally independent competitors. In Europe the economic framework is very different. Japanese style supplier relationships might simply not work in Europe.
Car manufacturers in Europe might not want to create a closer cooperation in development for different reasons :
Supplier might have to deal with the following problems :
- increased investments in a closer relationship are sunk costs, if the customer changes the supplier
- risk of development for a car manufacturer which will finally not be accepted by the car manufacturer for external reasons such as a change of marketing estimations or political factors
- new developed features or ideas of the supplier might be exploited by the car manufacturer himself or transmitted to another supplier which has been chosen for supply All these potential difficulties might motivate car manufacturers to keep as much design activities as possible in-house or to avoid close relationships to suppliers.
In the following some conditions are proposed which will foster the creation of a closer cooperation of supplier and buyer in product development. A certain number of the conditions have to be fulfilled to make a supplier partnership beneficial for both parties. The conditions are presented on three levels : product characteristics, co-operating companies characteristics, and the nature of relationship.
Products with the following characteristics will increase the utility of a closer integration of supplier in development or even make it necessary :
The necessity and benefits of a partnership approach in product development are much bigger in the case of a new unique technology. For the development of a standard product the interest of the manufacturer to get involved in the development is low. A product with important interfaces to the rest of the car is for example a part of the body of the car. Such part cannot be developed independently of other car body parts where the development is only co-ordinated by the manufacturer. Close co-operation is necessary.
A supplier integrated in the product development process of a car manufacturer will always have to justify this position. Lowest prices, excellent quality and respecting development delays are just conditions. Technology leadership can convince a manufacturer to co-operate with the right supplier(s). Technology leadership requires important development resources.
An existing relationship between supplier and buyer might be a condition for the creation of a closer cooperation :
Experience is necessary in order to create a high level of trust. It is important to remember, that the decisions in a company are taken by humans. Humans need a certain level of trust to be ready to share what is considered as a secret and what represents a strategic value for the company and for these individuals. This trust must be founded on more than experience and good intentions. Partner specific investments can create high switching cost. The barriers to exit the relationship are therefore higher for both sides.
Fulfilling a certain number of this criteria is a condition for the creation of closer supplier relations in product development. This might hold only for a few suppliers and buyers.
Two development projects of subsystems for two different car manufacturers have been analysed. We showed that both car manufacturers outsourced product development activities and delegated an important part of the responsibility to the supplier. Car manufacturers and the supplier co-designed the products. A direct integration of the supplier in a car development project of the buyer was not be observed. In one case the co-ordination of development activities of supplier and car manufacturer was managed by an engineering department of the car manufacturer in the other case the supplier product was designed for several car models and not linked to a specific car development project. The development activity however was also co-ordinated by the engineering department of the manufacturer. Intense communication and early testing of prototypes were factors of success of the relationship.
Significant differences in the relationships between the supplier and the car manufacturers could be identified. One manufacturer granted more autonomy of design to the supplier, Bluecar used a single sourcing method, prices initially contracted were held to, additional design efforts were paid for and quality problems were solved in a co-operative manner. The other car manufacturer changed the supplier relationship during the product development : The price of the product being developed was re-negotiated and a second supplier was selected to develop the same product. Missed quality objectives during the product phase lead to a punishment of the supplier by the reduction of the supplier share in favour of the parallel supplier. Two different strategies of car manufacturers could be identified.
Critical issues of the development projects have been identified. In both cases the applied technology caused problems. A sub-supplier could not finish the development of a new key component and in the other case, a technology applied in the product made it impossible to improve the product. Technology management in the supply chain is therefore critical.
The multi customer supplier adapts to the request for a closer cooperation with car manufactures with the creation of a cross-functional organization. The cross-functional organization is not limited as traditionally on the period of development projects, but is in place continuously for an improved orientation towards each customer.
Finally potential difficulties of closer supplier buyer relationships and conditions fostering the creation of such relationships have been described. The two analysed cases, the potential difficulties and the proposed conditions fostering a closer relationship suggest that the introduction of this approach of supplier relations might not be as vast as in Japan and might be utilised by a very limited number of business partners. Only a few top first tier suppliers will become real partners in product development. But will such partnership relationships be stable ? Future research should provide some evidence.
Alex KESSELER
Centre de Recherche en Gestion
de l'École Polytechnique