Lean Supply Chain Management
   Principles and Practices





     Professor Deborah Nightingale

            October 3, 2...
Lean Supply Chain Management 

                                            Learning Points


         •	 Lean supply chain...
Theory: Lean Represents a “Hybrid”

                     Approach to Organizing Interfirm

                              R...
Lean Supply Chain Management Differs 

                     Sharply from Conventional Practices (I)

      ILLUSTRATIVE   ...
Lean Supply Chain Management Differs 

                     Sharply from Conventional Practices (II)

        ILLUSTRATIVE...
Lean Supply Chain Management Principles 

                   Derive from Basic Lean Principles 


        •	 Focus on the ...
Mutually-Reinforcing Lean Practices 

                        Translate these Principles into Action

           Design su...
Synchronized Production and Delivery
Synchronized Production and Delivery Throughout 

              the Supplier Network is a Central Lean Concept


      •	 ...
Supplier Certification has been an Important 

                 Early Enabler of Achieving Synchronized Flow in 

        ...
Concrete Example: Engine Parts Casting 

                        Supplier Worked with Customer Company to 

              ...
Mastering & Integrating Lean Basics with Prime 

                  was Necessary for Achieving Synchronized Flow


       ...
Partnerships and Strategic Alliances
Paradigm Shift in Supply Chain Management 

                      Thinking: Evolving Lean Supplier Networks



           ...
Lean Supplier Networks Offer Significant 

                          Competitive Advantages


         •	 Exhibit superior...
Supplier Partnerships & Strategic 

                  Alliances Bring Important Mutual Benefits

         •	 Reduced trans...
Major Lean Lessons


         • Supply chain design linked to corporate strategic thrust
                   • Fewer first-...
Chrysler: Supplier Partnerships

                                                      Speed Development


               ...
Integrate suppliers early into 

                              design and development IPTʼs





ESD.61J / 16.852J: Integr...
Evolution of Early Supplier Integration
                                               in the Aerospace Industry

      “O...
Strategic Emphasis on Fostering Innovation for 

                     Value Creation across Enterprise Networks 


•	 Tran...
Summary of Key Practices Enabling 

                               Architectural Innovation

                     •	    Pr...
Electronic Integration of Supplier 

                                   Networks: Early Results

 Challenge: Electronic in...
Quick Review of Aerospace Progress


  •	 Aerospace industry has made important strides in supplier integration,
     but ...
Lean Supplier Networks Offer Significant 

                          Competitive Advantages


         •	 Exhibit superior...
Key Questions for Enterprise 

                                           Management (1)

         •	 Does the size, struc...
Key Questions for Enterprise 

                                           Management (2)


         •	 Is your enterprise ...
Supplier Partnerships Driven by Strategic Corporate 

                        Thrust to Develop Integrated Supplier Networ...
Focus on Early Supplier Integration 


   Historic opportunity for achieving BEST LIFECYCLE VALUE in
   aerospace weapon s...
Lean Difference: Auto Industry


                Lean Difference: Significantly lower development cost and
               ...
Lean Difference: Auto Industry

                                      Supplier Role in Design

                Lean differ...
Focus on Total Value Stream 

                                             Transformation*


                             ...
Collaborative Enterprise Supplier

            Networks
Collaborative Advantage1

                                                4 Elements of the Extended Enterprise




      ...
Collaborative Advantage1

                                                     Integration-Disintegration Pressures


    ...
Collaborative Advantage1

                                                     Integration Liabilities


  •	 Loss of High...
Collaborative Advantage1

                                                           Collaboration Pressures


           ...
Collaborative Advantage1

                                                      Current Trends




                 Key Tr...
Collaborative Advantage1

                                                     Summary of “Governance Profiles”




      ...
Collaborative Advantage1

                                                       Example “Governance Profiles”




       ...
Collaborative Advantage1
                                                          Profitability (1982-1998)


       Toyo...
Collaborative Advantage1

                                                      “Governance Profile Summary”



Relationsh...
Collaborative Advantage1

                                                     “Virtual Integration – 3 Ingredients”




 ...
Collaborative Advantage1

                                                     Dedicated Assets




    • Dedicated Asset ...
Collaborative Advantage1

                                                                                          Site S...
Collaborative Advantage1
                                                                       Human Specialization


   ...
Collaborative Advantage1

                                                     Physical Asset Specialization



          ...
Collaborative Advantage1
                                                        Toyota’s Consulting Teams



           •...
Long Term Contracts and Pricing1

     Focus should be on
      Improvement…
    Cost and Price follows.                  ...
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Lean Supply Chain Management Principles and Practices

  1. 1. Lean Supply Chain Management Principles and Practices Professor Deborah Nightingale October 3, 2005
  2. 2. Lean Supply Chain Management Learning Points • Lean supply chain management represents a new way of thinking about supplier networks • Lean principles require cooperative supplier relationships while balancing cooperation and competition • Cooperation involves a spectrum of collaborative relationships & coordination mechanisms • Supplier partnerships & strategic alliances represent a key feature of lean supply chain management ESD.61J / 16.852J: Integrating the Lean Enterprise Page 2 © Deborah Nightingale, 2005 Massachusetts Institute of Technology
  3. 3. Theory: Lean Represents a “Hybrid” Approach to Organizing Interfirm Relationships • “Markets” (Armʼs Length): Lower production costs, higher coordination costs • Firm buys (all) inputs from outside specialized suppliers • Inputs are highly standardized; no transaction-specific assets • Prices serve as sole coordination mechanism • “Hierarchies” (Vertical Integration): Higher production costs, lower coordination costs • Firm produces required inputs in-house (in the extreme, all inputs) • Inputs are highly customized, involve high transaction costs or dedicated investments, and require close coordination • “Lean” (Hybrid): Lowest production and coordination costs; economically most efficient choice-- new model • Firm buys both customized & standardized inputs • Customized inputs often involve dedicated investments • Partnerships & strategic alliances provide collaborative advantage Dominant conventional approach: Vertical integration, armʼs length relationships with suppliers ESD.61J / 16.852J: Integrating the Lean Enterprise Page 3 © Deborah Nightingale, 2005 Massachusetts Institute of Technology
  4. 4. Lean Supply Chain Management Differs Sharply from Conventional Practices (I) ILLUSTRATIVE CONVENTIONAL LEAN CHARACTERISTICS MODEL MODEL Number & structure Many; vertical Fewer; clustered Procurement personnel Large Limited Outsourcing Cost-based Strategic Nature of interactions Adversarial; zero-sum Cooperative; positive-sum Relationship focus Transaction-focused Mutually-beneficial Selection criteria Lowest price Performance Contract length Short-term Long-term Pricing practices Competitive bids Target costing Price changes Upward Downward Quality Inspection-intensive Designed-in ESD.61J / 16.852J: Integrating the Lean Enterprise Page 4 © Deborah Nightingale, 2005 Massachusetts Institute of Technology
  5. 5. Lean Supply Chain Management Differs Sharply from Conventional Practices (II) ILLUSTRATIVE CONVENTIONAL LEAN CHARACTERISTICS MODEL MODEL Delivery Large quantities Smaller quantities (JIT) Inventory buffers Large Minimized; eliminated Communication Limited; task-related Extensive; multi-level Information flow Directive; one-way Collaborative; two-way Role in development Limited; build-to-print Substantial Production flexibility Low High Technology sharing Very limited; nonexistent Extensive Dedicated investments Minimal-to-some Substantial Mutual commitment Very limited; nonexistent High Governance Market-driven Self-governing Future expectations No guarantee Considerable ESD.61J / 16.852J: Integrating the Lean Enterprise Page 5 © Deborah Nightingale, 2005 Massachusetts Institute of Technology
  6. 6. Lean Supply Chain Management Principles Derive from Basic Lean Principles • Focus on the supplier network value stream • Eliminate waste • Synchronize flow • Minimize both transaction and production costs • Establish collaborative relationships while balancing cooperation and competition • Ensure visibility and transparency • Develop quick response capability • Manage uncertainty and risk • Align core competencies and complementary capabilities • Foster innovation and knowledge-sharing ESD.61J / 16.852J: Integrating the Lean Enterprise Page 6 © Deborah Nightingale, 2005 Massachusetts Institute of Technology
  7. 7. Mutually-Reinforcing Lean Practices Translate these Principles into Action Design supplier network architecture • Design of supplier network driven by strategic thrust • Fewer suppliers; “clustered control” • Supplier selection based on performance Develop compleme ntary supplier • Ensured process capability (certification) capabilities • Targeted supplier development (SPC, Kaizen) • Greater responsibilities delegated to suppliers Create flow and pull throughout • Linked business processes, IT/IS infrastructure supplier network • Two-way information exchange & visibility • Synchronized production and delivery (JIT) Establish cooperative relationships & • Joint problem-solving; mutual assistance effective coordination mechanisms • Partnerships & strategic alliances • Open and timely communications • Increased interdependence & “shared destiny” Maximize flexibility & responsiveness • Seamless information flow • Flexible contracting • Rapid response capability Optimize product development • Integrate suppliers early into design & through early supplier integration development IPTs • Collaborative design; architectural innovation • Open communications and information sharing • Target costing; design-to-cost Integrate knowledge and foster • Knowledge-sharing; technology transfer innovation • Aligned technology roadmaps ESD.61J / 16.852J: Integrating the Lean Enterprise Page 7 © Deborah Nightingale, 2005 Massachusetts Institute of Technology
  8. 8. Synchronized Production and Delivery
  9. 9. Synchronized Production and Delivery Throughout the Supplier Network is a Central Lean Concept • Integrated supplier lead times and delivery schedules • Flows from suppliers pulled by customer demand (using takt time, load leveling, line balancing, single piece flow) • Minimized inventory through all tiers of the supply chain • On-time supplier delivery to point of use • Minimal source or incoming inspection • Effective two-way communication links to coordinate production & delivery schedules • Striving for zero quality defects essential to success • Greater efficiency and profitability throughout the supplier network ESD.61J / 16.852J: Integrating the Lean Enterprise Page 9 © Deborah Nightingale, 2005 Massachusetts Institute of Technology
  10. 10. Supplier Certification has been an Important Early Enabler of Achieving Synchronized Flow in Aerospace Percent of Direct Production Suppliers of a typical Aerospace Enterprise that are Certified (1991,1993, 1995) 1991 1993 1995 Source: LAI ESD.61J / 16.852J: Integrating the Lean Enterprise Page 10 © Deborah Nightingale, 2005 Massachusetts Institute of Technology
  11. 11. Concrete Example: Engine Parts Casting Supplier Worked with Customer Company to Achieve Synchronized Flow Source: LAI ESD.61J / 16.852J: Integrating the Lean Enterprise Page 11 © Deborah Nightingale, 2005 Massachusetts Institute of Technology
  12. 12. Mastering & Integrating Lean Basics with Prime was Necessary for Achieving Synchronized Flow • 6S -- Visual factory • Total productive maintenance • Quality control • Process certification • Mistake proofing • Setup reduction • Standard work • Kaizen ESD.61J / 16.852J: Integrating the Lean Enterprise Page 12 © Deborah Nightingale, 2005 Massachusetts Institute of Technology
  13. 13. Partnerships and Strategic Alliances
  14. 14. Paradigm Shift in Supply Chain Management Thinking: Evolving Lean Supplier Networks Value creation • Earlysupplier integration into design Network • Alignment of technology roadmaps (Innovation) • Knowledge integration & fostering innovation across supplier network Supplier network • Supplier partnerships & alliances Efficiency • Common objectives (Integration) • Value stream mapping • Continuous improvement Supply chain • Make-buy linked to corporate strategic thrust Design • Align & develop supplier capabilities (Restructuring) • Open communications ESD.61J / 16.852J: Integrating the Lean Enterprise Page 14 © Deborah Nightingale, 2005 Massachusetts Institute of Technology
  15. 15. Lean Supplier Networks Offer Significant Competitive Advantages • Exhibit superior performance system-wide -- greater efficiency, lower cycle time, higher quality • Not an accident of history but result of a dynamic evolutionary process • Not culture dependent but are transportable worldwide • Can be built through a proactive, well-defined, process of change in supply chain management ESD.61J / 16.852J: Integrating the Lean Enterprise Page 15 © Deborah Nightingale, 2005 Massachusetts Institute of Technology
  16. 16. Supplier Partnerships & Strategic Alliances Bring Important Mutual Benefits • Reduced transaction costs (cost of information gathering, negotiation, contracting, billing) • Improved resource planning & investment decisions • Greater production predictability & efficiency • Improved deployment of complementary capabilities • Greater knowledge integration and R&D effectiveness • Incentives for increased innovation (through cost-sharing, risk-sharing, knowledge-sharing) • Increased mutual commitment to improving joint long-term competitive performance ESD.61J / 16.852J: Integrating the Lean Enterprise Page 16 © Deborah Nightingale, 2005 Massachusetts Institute of Technology
  17. 17. Major Lean Lessons • Supply chain design linked to corporate strategic thrust • Fewer first-tier suppliers • Greater supplier share of product content • Strategic supplier partnerships with selected suppliers • Trust-based relationships; long-term mutual commitment • Close communications; knowledge-sharing • Multiple functional interfaces • Early supplier integration into design • Early and major supplier role in design • Up-front design-process integration • Leveraging supplier technology base for innovative solutions • Self-enforcing agreements for continuous improvement • Target costing • Sharing of cost savings ESD.61J / 16.852J: Integrating the Lean Enterprise Page 17 © Deborah Nightingale, 2005 Massachusetts Institute of Technology
  18. 18. Chrysler: Supplier Partnerships Speed Development 234 Weeks 232 Weeks 183 Weeks 180 Weeks 184 Weeks 160 Weeks* Length of Product Development Cycle K-Car (81) Dakota LH Cars (93) Neon (94) JA; Cirrus/ LH Cars (98E) Minivan (84) Truck (87) Stratus (95) Shadow (87) Source: Dyer * Estimated (1998) ESD.61J / 16.852J: Integrating the Lean Enterprise Page 18 © Deborah Nightingale, 2005 Massachusetts Institute of Technology
  19. 19. Integrate suppliers early into design and development IPTʼs ESD.61J / 16.852J: Integrating the Lean Enterprise Page 19 © Deborah Nightingale, 2005 Massachusetts Institute of Technology
  20. 20. Evolution of Early Supplier Integration in the Aerospace Industry “Old” Approach “Current” “Emerging” Lean Lean Prime Rigid vertical Collaborative with rigid Virtual Team FFF interfaces organizational w/o boundaries and control Prime interfaces Prime Key Suppliers Key Suppliers Key Suppliers Subtiers Subtiers Subtiers Armʼs length; interfaces totally Collaborative; but constrained by Collaborative and seamlessly defined and controlled prior workshare arrangements integrated, enabling architectural innovation ARCHITECTURAL INNOVATION: Major modification of how components in a system/product are linked together •Significant improvement in system/product architecture through changes in form/structure, functional interfaces or system configuration •Knowledge integration over the supplier network (value stream perspective ; prime-key suppliers-subtiers; tapping supplier technology base) ESD.61J / 16.852J: Integrating the Lean Enterprise Page 20 © Deborah Nightingale, 2005 Massachusetts Institute of Technology
  21. 21. Strategic Emphasis on Fostering Innovation for Value Creation across Enterprise Networks • Transform “tribal regimes” (todayʼs transaction-intensive supplier networks) into “innovation networks” (learning networks with shared goals) • Collaborative networks • Enhanced flexibility • Responsiveness to emerging needs • Emphasis on: • Innovations in system & cross-platform integration (primes) • Modular & architectural innovation (supplier networks) ESD.61J / 16.852J: Integrating the Lean Enterprise Page 21 © Deborah Nightingale, 2005 Massachusetts Institute of Technology
  22. 22. Summary of Key Practices Enabling Architectural Innovation • Pre-sourcing; long-term commitment • Early supplier integration into IPTs; IPPD; co-location; joint design & configuration control • Leveraging technology base of suppliers (key suppliers; tooling suppliers; subtiers) • Workshare arrangements optimizing supplier core competencies • Retaining flexibility in defining system configuration • Open communications; informal links; knowledge-sharing • Target costing; design to cost • Supplier-capability-enhancing investments • Incentive mechanisms (not to compete agreements; long-term warranty); maintaining trade secrets • Government part of the team; relief from military standards and specifications ESD.61J / 16.852J: Integrating the Lean Enterprise Page 22 © Deborah Nightingale, 2005 Massachusetts Institute of Technology
  23. 23. Electronic Integration of Supplier Networks: Early Results Challenge: Electronic integration of supplier networks for technical data exchange as well as for synchronization of business processes • Important success factors include: • Clear business vision & strategy • Early stakeholder participation (e.g., top management support; internal process owners; suppliers ; joint configuration control) • Migration/integration of specific functionality benefits of legacy systems into evolving new IT/IS infrastructure • Great care and thought in scaling-up experimental IT/IS projects into fully- functional operational systems • Electronic integration of suppliers requires a process of positive reinforcement -- greater mutual information exchange helps build increased trust, which in turn enables a closer collaborative relationship and longer-term strategic partnership • Close communication links with overseas suppliers pose a serious security risk and complex policy challenge ESD.61J / 16.852J: Integrating the Lean Enterprise Page 23 © Deborah Nightingale, 2005 Massachusetts Institute of Technology
  24. 24. Quick Review of Aerospace Progress • Aerospace industry has made important strides in supplier integration, but this is only the beginning of the road • Production: Supplier certification and long-term supplier partnerships -- process control & parts synchronization • Development: Early supplier integration into product development critical • Strategic supply chain design is a meta core competency • Implementation efforts have required new approaches • Re-examination of basic assumptions (e.g., make-buy) • New roles and responsibilities between primes and suppliers • Communication and trust fundamental to implementation • Aerospace community faces new challenges and opportunities • Imperative to take “value stream” view of supplier networks • Focus on delivering best lifecycle value to customer • Need to evolve information-technology-mediated new organizational structures for managing extended enterprises in a globalized market environment ESD.61J / 16.852J: Integrating the Lean Enterprise Page 24 © Deborah Nightingale, 2005 Massachusetts Institute of Technology
  25. 25. Lean Supplier Networks Offer Significant Competitive Advantages • Exhibit superior performance system-wide -- greater efficiency, lower cycle time, higher quality • Not an accident of history but result of a dynamic evolutionary process • Not culture dependent but are transportable worldwide • Can be built through a proactive, well-defined, process of change in supply chain management ESD.61J / 16.852J: Integrating the Lean Enterprise Page 25 © Deborah Nightingale, 2005 Massachusetts Institute of Technology
  26. 26. Key Questions for Enterprise Management (1) • Does the size, structure and composition of the supplier network reflect your enterpriseʼs strategic vision? • Has your enterprise created partnerships and strategic alliances with key suppliers to strengthen its long-term competitive advantage? • Are suppliers integrated into your enterpriseʼs product, process and business development efforts? ESD.61J / 16.852J: Integrating the Lean Enterprise Page 26 © Deborah Nightingale, 2005 Massachusetts Institute of Technology
  27. 27. Key Questions for Enterprise Management (2) • Is your enterprise actively fostering innovation across your supplier network? • Are you integrating knowledge throughout your enterprise value stream? • Has your enterprise established mutually-beneficial arrangements with suppliers to ensure flexibility and responsiveness to unforeseen external shifts? • Does your enterprise have in place formal processes and metrics for achieving continuous improvement throughout the extended enterprise? ESD.61J / 16.852J: Integrating the Lean Enterprise Page 27 © Deborah Nightingale, 2005 Massachusetts Institute of Technology
  28. 28. Supplier Partnerships Driven by Strategic Corporate Thrust to Develop Integrated Supplier Networks KEY PRACTICES BEFORE AFTER Reduced and streamlined supplier base • Number of direct production suppliers 542 162 Improved procurement efficiency • Procurement personnel as % of total employment (%) 4.9 1.9 • Subcontracting cycle time (days) 13 7 Improved supplier quality and schedule • Procurement (dollars) from certified suppliers (%) 0 75 • Supplier on-time performance (% of all shipments) 76.4* 83.0 Established strategic supplier partnerships • Procurement dollars under long-term agreements(%) 0 95 • “Best value” subcontracts as % all awards 50.0 100.0 Source: LAI BEFORE: 1989 AFTER: 1997 *Refers to 1991 ESD.61J / 16.852J: Integrating the Lean Enterprise Page 28 © Deborah Nightingale, 2005 Massachusetts Institute of Technology
  29. 29. Focus on Early Supplier Integration Historic opportunity for achieving BEST LIFECYCLE VALUE in aerospace weapon system acquisition through early supplier integration into design and development process • Nearly 80% of life cycle cost committed in early design phase • Design and development of complex aerospace systems calls on core capabilities of numerous suppliers, providing as much as 60%-70% of end product value • Supplier network represents an enormous beehive of distributed technological knowledge & source of cost savings • What are better ways of leveraging this capability for more efficient product development in aerospace sector? • Worldwide auto industry experience provides critical lessons ESD.61J / 16.852J: Integrating the Lean Enterprise Page 29 © Deborah Nightingale, 2005 Massachusetts Institute of Technology
  30. 30. Lean Difference: Auto Industry Lean Difference: Significantly lower development cost and shorter cycle time Average engineering 3.4 hours per new car US Japan 1.7 (millions of hours) 50% Average development 61 cycle time per new car US 45 (months) Japan 26% Prototype lead time 11.8 US (months to first 6.5 engineering prototype) Japan 45% Source: Clark, Ellison, Fujimoto and Hyun (1995); data refer to 1985-89. ESD.61J / 16.852J: Integrating the Lean Enterprise Page 30 © Deborah Nightingale, 2005 Massachusetts Institute of Technology
  31. 31. Lean Difference: Auto Industry Supplier Role in Design Lean difference starts with significant supplier role in design and development US 3% Japan 16% 8% 30% 81% 62% 1980ʼs (1985-89) 12% 6% 58% 30% 39% 1990ʼs 55% (1992-95) Supplier Proprietary Parts Assembler Designed Supplier Designed Detail-Controlled Parts “Black Box” Parts Percent of total cost of parts purchased from suppliers ESD.61J / 16.852J:Ellison, Fujimoto and Hyun (1995) Source: Clark, Integrating the Lean Enterprise Page 31 © Deborah Nightingale, 2005 Massachusetts Institute of Technology
  32. 32. Focus on Total Value Stream Transformation* Value Stream Traditional Transformation Bilateral Focus Focus Customer Customer Large Critical Suppliers with Dominant Cost Content Lower-tier Suppliers Left to Direct Involvement to Foster Competitive Pressures to Drive Improvement throughout the Continuous Improvement Value Stream *Builds on and extends Paul Cejas, Donnita Bennett and Susan Moehring, “A Value Stream Approach to Weapon Systems Affordability,” Presentation at the Lean Aerospace Initiative (LAI) Joint Workshop in Dallas, TX (31 January 2001). ESD.61J / 16.852J: Integrating the Lean Enterprise Page 32 © Deborah Nightingale, 2005 Massachusetts Institute of Technology
  33. 33. Collaborative Enterprise Supplier Networks
  34. 34. Collaborative Advantage1 4 Elements of the Extended Enterprise 1. Designing the boundaries of the firm (i.e. the “Governance Profile” 2. Investing in “Dedicated (relationship-specific) Assets” 3. Inter-organizational Knowledge-sharing 4. Inter-organizational Trust ESD.61J / 16.852J: Integrating the Lean Enterprise Page 34 © Deborah Nightingale, 2005 Massachusetts Institute of Technology 1Source: "Collaborative Advantage" by Jeff Dyer
  35. 35. Collaborative Advantage1 Integration-Disintegration Pressures Specialization Firms have always been better increases the costs of than markets in coordinating communication and coordination, increasing incentive complex tasks. to in-source Productivity grows with the Markets have always been better division of labor. Specialization than firms in achieving gives access to productivity. Economies of Scale Tier 0 Tier 1 Vertical Integration Vertical Integration Tier 2 Armʼs Tier 3 Length ESD.61J / 16.852J: Integrating the Lean Enterprise Page 35 © Deborah Nightingale, 2005 Massachusetts Institute of Technology 1Source: "Collaborative Advantage" by Jeff Dyer
  36. 36. Collaborative Advantage1 Integration Liabilities • Loss of High-Powered Incentives • No strong connection between output and rewards • Difficult to “fire” a sister division • Less access to residual profits • Loss of Scale and Access to Outside Customers • Loss of economies of scale • Loss of information from external customers who provide ideas • Catch-22: prohibited from selling superior products outside, however, if not differentiated, then buyers wonʼt purchase products from competitors. • Loss of Strategic Flexibility • Inability to raise capital • Higher Labor Costs • Larger firms tend to pay higher wages and have stronger labor unions ESD.61J / 16.852J: Integrating the Lean Enterprise Page 36 © Deborah Nightingale, 2005 Massachusetts Institute of Technology 1Source: "Collaborative Advantage" by Jeff Dyer
  37. 37. Collaborative Advantage1 Collaboration Pressures Integration causes: •Loss of Incentives •Loss of Scale •Loss of customer access •Inability to Raise Capital •Higher Labor Costs Armʼs Length Outsourcing causes: •Less technology development •Less Risk-sharing Tier 0 Vertical Integration Tier 1 Vertical Integration Virtual Tier 2 Integration Armʼs Armʼs Tier 3 Length Length ESD.61J / 16.852J: Integrating the Lean Enterprise Page 37 © Deborah Nightingale, 2005 Massachusetts Institute of Technology 1Source: "Collaborative Advantage" by Jeff Dyer
  38. 38. Collaborative Advantage1 Current Trends Key Trends: Result: Implication: 1. Advancement in Information Technology Pressures for greater Vertical Integration Specialization of is less desirable 2. Growth in Knowledge Economic Activities and increased Product Complexity Pressures for greater Armʼs Length Relationships 3. Increased Coordination of are less desirable Customization Economic Activities of Demand ESD.61J / 16.852J: Integrating the Lean Enterprise Page 38 © Deborah Nightingale, 2005 Massachusetts Institute of Technology 1Source: "Collaborative Advantage" by Jeff Dyer
  39. 39. Collaborative Advantage1 Summary of “Governance Profiles” Vertical Tier 0 Coordination Integration Tier 1 Vertical Integration Virtual Specialization Vertical Integration & Coordination Integration Tier 2 Armʼs Armʼs Tier 3 Specialization Length Length Governed internally Governed externally Governed externally by Hierarchy by Legal Contracts by Trust and Implicit Long-Term Agreements ESD.61J / 16.852J: Integrating the Lean Enterprise Page 39 © Deborah Nightingale, 2005 Massachusetts Institute of Technology 1Source: "Collaborative Advantage" by Jeff Dyer
  40. 40. Collaborative Advantage1 Example “Governance Profiles” 100% Manufactured 27% Internally 55% % of Total Component Costs Partner 48% 10% Suppliers 35% Armʼs Length 25% Suppliers GM & Ford Toyota ESD.61J / 16.852J: Integrating the Lean Enterprise Page 40 © Deborah Nightingale, 2005 Massachusetts Institute of Technology 1Source: "Collaborative Advantage" by Jeff Dyer
  41. 41. Collaborative Advantage1 Profitability (1982-1998) Toyota is twice as profitable, and Toyotaʼs Suppliers are 50% more profitable than other Japanese or US suppliers. 10% 9.6% Partnership Focused Companies 8% Pretax 6.4% Return Armʼs Length On 6% Focused Companies Assets 4.4% 4% 3.2% 2.8% Ford is leader of Lean Production Chrysler is leader of Lean Enterprise 2% Toyota Chrysler Ford Nissan GM ESD.61J / 16.852J: Integrating the Lean Enterprise Page 41 © Deborah Nightingale, 2005 Massachusetts Institute of Technology 1Source: "Collaborative Advantage" by Jeff Dyer
  42. 42. Collaborative Advantage1 “Governance Profile Summary” Relationship Relationship Driver Products Governance Supplier Characteristics Method Characteristics Vertical Governed Internally Integration by Hierarchy Coordination High: •Dedicated Investments Governed Externally High Quality / Virtual •Knowledge-Sharing Coordination & Differentiated, by Trust and Implicit Low Quantity Integration •Trust Specialization Complex Long-Term Agreements (2) Suppliers Low: Low Quality / Armʼs •Dedicated Investments Specialization Commodity Governed Externally High Quantity Length •Knowledge-Sharing by Legal Contracts Suppliers •Trust Getting firms to Specialize is much less difficult than getting them to Collaborate ESD.61J / 16.852J: Integrating the Lean Enterprise Page 42 © Deborah Nightingale, 2005 Massachusetts Institute of Technology 1Source: "Collaborative Advantage" by Jeff Dyer
  43. 43. Collaborative Advantage1 “Virtual Integration – 3 Ingredients” • Dedicated Asset Investments • Investment in factories, equipment, processes and people that are customized to a particular customer or supplier. • Knowledge-Sharing Routines • Proprietary Knowledge • Inter-firm Trust • History of following-through on promises and commitments and refusal to take advantage, even when it has the chance. ESD.61J / 16.852J: Integrating the Lean Enterprise Page 43 © Deborah Nightingale, 2005 Massachusetts Institute of Technology 1Source: "Collaborative Advantage" by Jeff Dyer
  44. 44. Collaborative Advantage1 Dedicated Assets • Dedicated Asset Investments • Investment in factories, equipment, processes and people that are customized to a particular customer or supplier. • Three types of Dedicated Assets: • Site Specialization • Physical Asset Specialization • Human Specialization • Toyotaʼs two types of suppliers: • Affiliated suppliers (Kankei Kaisha). • Toyota has a minority stock ownership position. • They transfer employees (Guest Engineers) • 20% of top managers were former Toyota employees • They average only 30 miles distance • Independent Suppliers (Dokuritsu Kaisha) ESD.61J / 16.852J: Integrating the Lean Enterprise Page 44 © Deborah Nightingale, 2005 Massachusetts Institute of Technology 1Source: "Collaborative Advantage" by Jeff Dyer
  45. 45. Collaborative Advantage1 Site Specialization Total Inventory as a Percent of Sales 0.12 Chrysler 0.10 Ford GM 0.08 Nissan 0.06 After Toyota set up in 0.04 Georgetown, Kentucky, Toyota roughly 90 suppliers followed them to Kentucky 0.02 100 200 300 400 500 600 Average Distance Between Supplier and Automaker Plants (in miles) ESD.61J / 16.852J: Integrating the Lean Enterprise Page 45 © Deborah Nightingale, 2005 Massachusetts Institute of Technology 1Source: "Collaborative Advantage" by Jeff Dyer
  46. 46. Collaborative Advantage1 Human Specialization 160 Chrysler 140 GM Ford Nissan Defects per 100 Vehicles 120 100 Toyota 80 60 40 20 2,000 4,000 6,000 8,000 10,000 Man-days of Face-to-Face Contact ESD.61J / 16.852J: Integrating the Lean Enterprise Page 46 © Deborah Nightingale, 2005 Massachusetts Institute of Technology 1Source: "Collaborative Advantage" by Jeff Dyer
  47. 47. Collaborative Advantage1 Physical Asset Specialization • 22% of Toyota’s supplierʼs capital investment were so dedicated to their primary customer, that they could not be redeployed if Toyota walked away. • 15% of US firms supplierʼs capital investment were so dedicated to their primary customer, that they could not be redeployed if the US firm walked away. ESD.61J / 16.852J: Integrating the Lean Enterprise Page 47 © Deborah Nightingale, 2005 Massachusetts Institute of Technology 1Source: "Collaborative Advantage" by Jeff Dyer
  48. 48. Collaborative Advantage1 Toyota’s Consulting Teams • OMCD (Operations Management Consulting Division) • 6 senior executives • 50 consultants • 15-20 permanent consultants • 25-30 “fast-track” younger consultants • TSSC (Toyota Supplier Support Center) • US version of the OMCD • Toyota invests $50 million annually on Supplier Training • This is only 0.03% on annual revenues of $150 billion • $50 million invested to achieve 3.3% spread on profits for themselves (& their suppliers) = $5 billion • For every $1 spent on Supplier Training, $100 comes back in profit. $100 profit $1 High Leverage in Organizational Learning ESD.61J / 16.852J: Integrating the Lean Enterprise Page 48 © Deborah Nightingale, 2005 Massachusetts Institute of Technology 1Source: "Collaborative Advantage" by Jeff Dyer
  49. 49. Long Term Contracts and Pricing1 Focus should be on Improvement… Cost and Price follows. Negotiated Price Curve Consider sharing Market Risk with suppliers by decoupling for First Period future sales volumes Negotiated Price Curve for Second Period Customer Price Savings Supplier Cost Reduction & Additional Profit Time Years 1-3 Years 4-6 ESD.61J / 16.852J: Integrating the Lean Enterprise Page 49 © Deborah Nightingale, 2005 Massachusetts Institute of Technology 1Source: "Collaborative Advantage" by Jeff Dyer

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