Lean Sourcing: The Top Three

We’re writing today as part of a score of bloggers on the topic of The Top Three issues in sourcing. Here’s is our Top Three:
3. Slow is the New Fast
When faced with the hard way and the easy way, always take the hard way. This is particularly true in Lean sourcing, or as we prefer to call it, supplier development. The most direct route is not always the fastest way to your destination, and likewise the lowest price source is not always the lower cost source.
The quick and easy approach is to switch to buying your commodity from the lowest cost country 5,000 miles away and take the immediate cost reduction. The slow and hard way is to spend tens of months strengthening the higher-priced local supplier so that they can delivery just in time, be an integral part of your new product design team, and never be an intellectual property threat.
Hard choice, and guess which option the sourcing specialist measured on cost reduction results delivered this quarter will choose?
Yet if you’re the newly minted number one automotive manufacturer in the world, you choose the hard way. For Toyota the sourcing decision is more like preparing for marriage than for a quick fling, according to a BusinessWeek interview with Yuki Funo who is the chairman and CEO of Toyota Motor Sales USA, in an article on April 26, 2007 titled The Toyota Way to No. 1:
[Question]
I remember a story related to me by a supplier company: They entered into a contract to supply axles for pickup trucks. It was the first contract his company had with Toyota. He said he was awarded the contract with no discussion of price. It was all based on whether his company’s processes and quality were acceptable to Toyota. He was flabbergasted. Is that a common way Toyota does business?

[Answer}
Toyota’s thinking based on the Toyota Way is teamwork with suppliers. This teamwork is going to be a long-lasting relationship. Price is only one element. Trust is a more important element. The relationship is a sharing concept, and should always be win-win. Price is important, too. But trust is perhaps more so. This is an idea that American business schools have come to preach. IBM (IBM), General Electric (GE), and other companies talk about how important the mission of the company is. Toyota is only doing intelligently what the business schools are teaching.
In the church when you get married, the priest or minister doesn’t ask each partner how much each will get from the other in terms of money. You’re asked about how well you get along. What is your commitment to one another? Now, in real-life situations, some companies practice this, and some don’t. Some practice this in the U.S. Some don’t. It’s the same in Japan. So there are fantastic achievements in both countries, and there are bankruptcies in both countries. So, it isn’t a Japanese issue or an American issue. It’s a company-culture issue.

There are many things that make Toyota great. They are dedicated to kaizen. They nurture and respect their people. They have a disciplined approach to planning and to how they design product. They work with their partners (supply chain) by taking the hard way.
I’m reminded of what a sales manager at an automotive parts supplier told me last summer. They were a supplier to Japanese car companies, but previously not Toyota. During the process of setting up sourcing agreements for the first time, the Toyota buyers actually told the supplier “You cannot make money on those parts at this price. Here is what we will pay.” And Toyota raised the price.
But does taking the long view and teaching kaizen to suppliers in a high-cost countries like the U.S. really trump shipping lowest-cost goods by boat from a lowest-cost country, today? Can companies that don’t have lots of profit and who can afford to pay more for building strong sourcing partners for the long-term, as Toyota can, really take the supplier development approach?
A bit of timely news today on ThomasNet.com would lead us to believe that Chinese Textile Shipping Can’t Compete with N.J. Mill’s Turnaround.
Thanks to state training grants, Absecon Mills was able to respond to customer orders in 14 days as opposed to 10 to 12 weeks from China:

• Workers brainstorm to improve processes;
• Management sees its job as supporting the workers’ improvements;
• The firm uses help from universities;
• The company cuts out wasted steps, wasted motions and wasted materials;
• Workers occasionally use videotapes to see and study their actions;
• Work flow was changed to reduce the set-up time between jobs;
• The workers measure the time it does take and the time it should take to do a task;
• During brainstorming sessions, typically about 48 ideas emerge; sometimes as many as 60 are voiced;
• Ideas are grouped as high- or low-impact and on how soon they can be acted upon; and
• Quality is a top priority.
In whole, the textile firm attributes its success to lean manufacturing.

Taking the time to develop suppliers who are continuously learning and improving their operations will result in the lower cost.
2.The 90-mile Rule
It’s awfully hard to develop the capabilities of suppliers who are more than a couple of hours’ drive away. Across the ocean? Might as well forget it. If the cost is low enough, we roll the cost of poor quality and late deliveries into the total landed cost and tell ourselves that we are still ahead of the game…
One of the excuses we hear when teaching Lean manufacturing and the TPS is along the lines of “We’re not Toyota” and is based on the fact that Toyota in Japan has something like 14 plants and the vast majority of suppliers all within about a 90 minute drive of Toyota City. “That’s one of the secrets to their success” is followed by the objection “which we can’t copy.”
Quoting Henry Ford, “If you think you can do a thing or think you can’t do a thing, you’re right.”
Several of our clients think they can. They sourced to lowest cost countries overseas but are now building the capability back in-house or sourcing within 90 miles, due to quality and delivery headaches from lowest cost sourcing. It’s a long slow, road.
In another bit of fortuitous timing, I heard on the radio this morning that Boeing took delivery of the nose cone of the 787 Dreamliner. The nose cone of an airplane is a big piece of composite, so they flew it here in a 747. I am a bit jet-lagged this week, and it was early morning so I may have dreamed this story.
Because they can. Boeing builds 747s, so if they want to use their 747s as a Just in Time conveyance method, why not? They flew one huge airplane part across the ocean in another huge airplane. Sound like sourcing innovation.
Could Boeing have built the nose cone within 90 miles of Seattle? But that would have been so 20th century…

1. DIYS

What is DIYS? Procurement specialists who have landed on this page expecting to find some newfangled get-lowest-cost-sourcing-quick technology will be disappointed by Do-It-Your-Sourcing. It’s DIY meets sourcing. Or perhaps we can call it in-sourcing.
Just as one of the wise kaizen teachers that came before us taught that “the best kanban is no kanban” and “the best process improvement is process elimination” I will say that the best sourcing strategy in the world is no sourcing. DIYS is not necessarily making everything yourself, but being able to make everything yourself if needed.
There is a story about Fujio Cho, the current Chairman of Toyota, being severely scolded by Taiichi Ohno some 40 years ago when Cho was in charge of making decisions to outsource parts to suppliers. Ohno’s point was that Toyota should not outsource parts that they could not first make in-house at a lower price and high quality.
Ohno saw the process within Toyota and within the suppliers as essentially connected, and he wanted these processes to be as strong as possible. Sourcing was not a mere commercial transaction to him, it was building a strong link in a supply chain. This idea persists to this day at Toyota.
This is not an easy road to follow, but after 40 years of following the hard road, Toyota has become the number one automobile company in the world.

2 Comments

  1. robert thompson

    April 26, 2007 - 5:02 am

    Excellent post! Whilst sourcing flexibility enables manufacturers to balance supplier flexibility with customer demand uncertainty, this article (http://tinyurl.com/2qdnrh) makes a salient point:
    Outsourcing is frequently presented as a labour cost benefit, but that’s far from the full story. The erosion of manufacturing infrastructure within Europe over the last two decades has undermined the responsiveness and competitive ability of many established manufacturing companies.
    Rob

  2. Manish Yadav

    May 12, 2007 - 1:32 pm

    A thought changing post .