UK: WHEN THE HAGGLING HAS TO STOP.

UK: WHEN THE HAGGLING HAS TO STOP. - Supply chain management, long a hot topic in the car industry, is winning converts in other sectors as companies realise there are limits to what can be achieved through internal reorganisation and re-engineering.

by Anita van de Vliet.
Last Updated: 31 Aug 2010

Supply chain management, long a hot topic in the car industry, is winning converts in other sectors as companies realise there are limits to what can be achieved through internal reorganisation and re-engineering.

In 1991, Harry Douthwaite was appointed purchasing director at Dewhirst, one of the leading manufacturers of clothing for Marks & Spencer. At that time, he says, Dewhirst, like so many other manufacturers, was suffering from escalating materials costs, towering stock levels, problems with waste and obsolescence and 'less than wonderful' relations with its 700 suppliers.

Douthwaite set to work. His aim, he says, was to put in place a purchasing strategy which would benefit both the company's customer (ie Marks & Spencer) and its suppliers. Supplier relationships would be based on 'openness, trust, honesty and agreed common objectives', and the traditional haggling on price among multiple suppliers would give way to a focus on total cost.

Within Dewhirst, he worked with divisional managers to develop a cross-functional approach to supplier selection and supplier development. They concentrated on single-source agreements and on developing close working relationships with a small network of suppliers. These suppliers, whose number is now vastly reduced, had to be prepared to deliver competitively priced, defect-free products in smaller batch quantities at precisely specified times. 'The five broad criteria for selection were quality, cost, delivery, product development and management,' says Douthwaite, referring to the QCDDM five-point measurement system introduced by Nissan and familiar to all who take supply chain management seriously.

Suppliers also had to be able to respond swiftly and effectively: fashion is a fast-moving affair, after all, and if there is a sudden run on scarlet blouses, say, then scarlet they must be. For its part, under the new arrangements, Dewhirst would change suppliers only on four very precise grounds: persistent quality problems, resistant to the efforts of the Dewhirst team sent in to help; persistent delivery problems, similarly resistant; the abuse of power which can result from single-source supply (a monopoly hiking prices unjustifiably, for example); and innovation from a rival, 'offering something no one else could offer'. When it came to new product development, suppliers were brought in at the concept stage, with the design, sales and technical departments of buyer and supplier companies working together.

Five years on, Douthwaite has now left Dewhirst and set up the Middlesbrough-based consultancy, Crichton Douthwaite, which advises a range of international clients on purchasing and supply management.

He looks back with some satisfaction on the purchasing transformation at Dewhirst, at a new system which is now 'entrenched in the culture' and, he claims, still 'unique in the UK textile industry', although similar to the buyer-supplier relationships at Nissan and Black & Decker, acknowledged leaders in the field. The drive means that some raw material prices (of trim packs, that is, everything that is not cloth) have remained constant since 1991, while the overall cost to Dewhirst of these materials has been reduced by better control of stocks and reduced obsolescence. Such developments have helped Dewhirst to more than double its turnover, from £131 million to £279 million over the period. And whereas other M&S suppliers have seen their profits fall, Dewhirst boasted a full percentage point rise in trading margins to 7.8%, and an increase in pre-tax profit of 31% for the year to end January.

Dewhirst's suppliers, meanwhile, have benefited from greatly increased volumes of work and previously unheard-of levels of efficiency. 'We worked with our suppliers, changing the way they worked so that it was unrecognisable,' says Douthwaite. The lead time for piece-dyed fabrics, for instance, once eight to 12 weeks, is often now only two, while in some instances, the lead time on top-dyed woven fabrics has been reduced to a fortnight from anything up to 20 weeks before. One supplier organisation, which had been working round the clock seven days a week, now works a 16-hour day, five-day week, and still sees its output up by 27% and overheads down by 8%.

A success story like this helps to explain why progressive companies in all sectors are now taking supply chain management ever more seriously.

Thus 3M, for example, a company with a span of over 60,000 innovative products, from Post-it Notes to pharmaceuticals, and over 100 technologies, now lists 'excellence in the supply chain' up there among its four key growth strategies.

One reason for this intensified interest, suggests Partnership or Power Play?, the 1995 research report on supply-chain integration from consultants AT Kearney, the UMIST School of Management and the Institute of Logistics, is that companies are coming to recognise the limits to what can be achieved through internal reorganisation, however effective. Looking at the supply chain as a whole shows up additional areas of waste, and therefore highlights scope for cost reduction. Service to the end-customer can be driven higher by a team effort between company, customer, suppliers and service providers.

A more recent report from the same source, Strategic Advantage and Supply Chain Collaboration, concludes that companies enter into collaborative relationships for a wide range of reasons. There may be mutual benefit at the operational level as in the relationship between Rover and TRW Steering Systems, where the latter is based in the carmaker's plant.

There may be mutual benefit at the strategic level, as in the strategic alliance between IBM and Microsoft in the development of the Acorn PC and the MS-DOS operating system back in 1981. (IBM could not have launched its PC by its target date without an operating system, while Microsoft might never have entered the operating systems market had it not been for the IBM Acorn.) At other times, collaboration brings immediate operational benefit for the customer but long-term competitive benefit for the supplier - as in the Ford quality initiative, for example, imposed on all suppliers; it may have seemed unnecessary for suppliers in the early 1980s, but it later turned out to be their salvation in meeting new industry norms.

These distinctions are a reminder that the subject is far from simple (although the new report, by Bernard Burnes and Steve New of UMIST, is written in mercifully clear terms).The issue has also been blurred by talk of partnerships, a hazy word imbued with notions of eternal togetherness that leaves sceptics cold. 'Effective collaboration', the authors suggest, would be a more apt term: 'While "partnership" makes assumptions about commitment and mutual dependency, collaboration could be worked out at a matter-of-fact level.'

Then, too, not all new-style relationships have quite the intended effect.

The earlier report tells of one firm which had developed close links with a demanding and prestigious customer and was delighted to win a coveted Supplier of the Year award - until further analysis revealed that it was losing money on every unit shipped. Another conventional customer relationship with a traditional arm's-length buyer, on the other hand, was yielding healthy profits. 'What price partnership?' ask the report's authors, as well they might.

There is, moreover, no single best way for collaborative relationships to function. They will be tailored by individual companies to particular situations. Some will be on greenfield sites, some not. Some will be short-lived and narrowly focused, comments New; others will extend for a considerable period and cover many issues.

The case of components supplier Rearsby Automotives, components supplier to Nissan (since 1984), Honda (since 1988), Toyota (since 1992), Rover and Ford provides a glimpse of this variety. Managing director Ivor Vaughan, a robust enthusiast for Japanese supply management techniques who led the management buy-out from the former BL in 1982, explains that at that time Rearsby was very much an underinvested part of BL. 'Going to bed with world-class customers would either drive us out of business or drag us up to world-class standards,' is how he summarises the Rearsby strategy. He recalls his visit, back in 1982, to a Nissan plant in Japan; it was, he says, like a science fiction scene, with its 'cleanliness, lack of stock, technology, and the simplicity of its systems and management'. Since then, he says, his five main customers have proved 'some of the best consultants in the world'. Each is different in approach, in detail and in the level of partnership (highest in Nissan), Vaughan explains; although the emphasis on quality is common to all, Rearsby has learned something different from each. From Nissan came the collaborative way of working, which extends from junior to senior members, and the Nissan supply development team of engineers, which came in 1986 to 'teach us old dogs new tricks' and to transfer best practice. From Honda, an engineering-led company 'paranoid about quality and cost', came the concentration on detail and cost analysis which results in a product that is right first time. From its third Japanese customer, Rearsby adopted the demand-led Toyota production system. 'The essence of the system is that the manufacturing rate should at all times equal the selling rate,' he says. 'We had to learn how to make a batch of one efficiently.' From Toyota, too, Rearsby learned the simplicity of the kanban system, four-times daily delivery and how to drive out waste. The company learned too from Ford's systematic Q1 quality system and procedures, and from Rover, the Rearsby board had an instructive session on training, pay and conditions with the personnel director.

Despite the variety of relationships, certain common themes emerge: collaborating with suppliers to drive costs out of the system without affecting margins, and rationalising or optimising supplier bases, for example. The latter is not solely a matter of reducing supplier numbers, although overall that is the trend. 3M, for example, had 145 packaging suppliers in 1990 and now has around 40, with the goal of bringing these down to 28. Rover has brought down supplier numbers from 1,200 to 700 over the last six years and envisages reducing their numbers further (Nissan, Honda and Toyota have only around 210 each), particularly since the merger with BMW brings the benefit of shared suppliers. Rearsby has reduced its own suppliers from 330 in 1988 to 43.

As Peter Copsey, 3M's purchasing contracts manager for raw materials and packaging, remarks, 'You can't have partnerships with thousands of suppliers'. In contrast to Dewhirst's focus on single-source agreements, moreover, 3M's business is such that a variety of approaches is required, and Copsey has drawn up an instructive portfolio management scheme applicable to his company's needs. With non-critical products, he explains, where both the supply risk and the savings or profit impact on 3M are low, the aim should be simplified systems, paperless purchases and delegation. With bottleneck products where supply risk is high but the profit impact is low, the key is to ensure supplies; this will entail holding stock, drawing up long-term contracts, regular reviews, alternative sources and contingency planning. Meanwhile, tactical purchases, where supply risk is low but savings or profit impact is high, demand short-term contracts, wheeling and dealing, risk-taking, the search for opportunities and an awareness of alternatives. And finally, strategic products call for intensive supplier management or supplier development, long-term contracts, contingency planning, supplier analysis, constant review, price forecasting, short-and long-term strategies, price and value analyses. 'It's here, where the supply risk and the savings or profit impact are high, that you put the emphasis on partnerships, and where you spend 80%-90% of your budget,' says Copsey.

When it comes to the factors that make for 'effective collaboration', there is a fair measure of agreement among practitioners. First comes communication - sitting down and actually discussing delivery and other specifications: 'talking not just written specifications', says Copsey; 'keeping in touch on a daily basis,' says Alex Reid, managing director of Donisthorpe, now sole supplier of thread to Dewhirst. 'In the old days, customers would just ring up and see if you had the right colour in stock,' Reid recalls. 'Now you have to be alert to changing taste on the high street: there's no room for distant relations.' Instead of the secretive approach which governed the old-style buyer-supplier relationships, there must be open exchange of all relevant information - including accurate forward forecasting, with continual dialogue to update and amend.

Next, says Copsey, you need commitment to the process at an appropriate level of management in the supplier company: in the case of 3M's packaging partnerships, this has always tended to be at managing director level.

You need a 'well-balanced, enthusiastic and committed team', and a set of mutually agreed objectives.

Vaughan's advice is that relationships must be active, not passive: 'You have to keep meeting each other's expectations'. There has also to be a degree of balance in the relationship: 'The customer always has the power, but gives some up, so you get a seesaw equilibrium.' He prefers not to use the word 'trust' - because 'you have to earn trust' - but suggests instead that a 'safe environment, where everything is on the table and where "no" is part of the equation' is an essential ingredient.

Finally, in all buyer-supplier relationships, power is likely to lie with the customer. But suppliers can improve their relative positions, and power does not always belong where you might think, as the following tale of Donisthorpe and Dewhirst illustrates.

In 1991, Dewhirst bought more than £1.2 million worth of thread from four suppliers - £650,000 from supplier A; £550,000 from supplier B; £40,000 from supplier C; and £10,000 from supplier D. The first step was to cut the number down to two - suppliers A and C. 'B didn't want to know,' recalls Douthwaite, 'because the objectives we were setting would drop his turnover'.

One third of the thread used in the UK textile industry goes to waste, he points out, and Dewhirst was planning to cut out its share of this waste and obsolescence.

Then, in early 1995, Donisthorpe was appointed single-source supplier 'because it had the most progressive, proactive and innovative management; it developed new products, granting Dewhirst exclusive periods; and it developed new systems to eliminate waste.' Supplier B at this point offered to reduce its prices by 25% but Dewhirst refused: 'We said, no, you can't afford it'.

Donisthorpe took control of inventory management for thread purchasing, calculating requirements on the basis of the six-week work schedule provided by Dewhirst. This almost halved Dewhirst's costs on thread purchases over the period 1991 to 1995. Nevertheless it meant Donisthorpe had grown its turnover with the company from £40,000 to £1.8 million a year, a sum that might, presumably, have pleased the bigger players. Now Donisthorpe has used the experience gained with Dewhirst to win custom from other M&S suppliers, from BHs and from Littlewoods - a happy twist to the threadmaker's tale.

Ground Rules - Supplying made simple

3M's Peter Copsey has devised a supplier portfolio management scheme,

defining what relationship is needed when.

Status of supplies Action

Non-critical products where Simplified systems,

supply risk and profits or paperless purchases and

savings impact are low delegation

Bottle-neck products where Secured supplies through

supply risk is high but profit holding stock,long-term

or savings impact is low contracts, regular reviews,

contingency plans

Tactical purchases where Short-term contracts and

supply risk is low but profit an awareness of the

or savings impact is high alternatives

Strategic products where Intensive supplier

supply risk and profit or relationships

savings impact are high.

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