15.4 Forms of Supplier Integration

One of your top objectives as a purchasing professional is to assure an uninterrupted flow of materials to support your firm's operations. Remember, if you shut down an assembly line because of a supply shortage, the costs are huge ($10,000 per minute in the auto industry). What is the most common reason for a supply shortage? You guessed it—planning and forecasting! The reality is that both you and your suppliers are guessing about what might happen in the future. Because the future is unknown, forecasts are almost always wrong. Inaccurate forecasts cause many sleepless nights for buyers. You should therefore do everything you can do to make your forecasts better.

How can you help improve forecast accuracy? Gaining access to better information is the key. Think about this for a moment and ask, "What is a forecast?" Answer: A forecast is a guess about the future. Traditional forecasting forces both you and your supply counterparts to guess something that the other person already knows. If you shared information, could you both better plan capacity and production? Absolutely! This is the essence of collaborative planning and forecasting. To see how you both benefit, consider the following:

• What is in it for your supplier? As your supplier counterpart prepares forecasts, she is guessing how much you are going to buy, when you will run a promotion, and what kind of promotion you will run. You already know the answers. By sharing, you reduce her uncertainty.

• What is in it for you? If your suppliers do a better job of planning, you will suffer fewer supply disruptions. Your benefits, however, don't stop there (see Table 15.3). Suppliers are a great source of market knowledge. After all, they also sell to your rivals. Although antitrust laws—and common sense—mean they can't tell you what your rivals are planning, they do possess unique market intelligence. For instance, what does it mean when you tell a supplier counterpart that you are running a promotion and plan to sell 100,000 units and she says, "No, you won't! You are overestimating by 30%."? Answer: One of your rivals is likely planning a promotion for the same time. The added competition will reduce your sales.

If you trust your suppliers and the collaborative forecasting process, you can improve forecasts, planning, and performance—all at minimal investment and risk!

Another way to assure an uninterrupted flow of materials is to shift responsibility for managing inventory to your suppliers. This process is called vendor managed inventory (VMI). Simply put, with VMI the supplier manages your inventory. If you've ever seen a Frito Lay driver stocking shelves at your local grocery store (from 7-11 to Kroger to Walmart), you've witnessed VMI in action. Table 15.4 compares the traditional inventory replenishment model to Frito-Lay's VMI process. You may be wondering, "What are the benefits of VMI?" Table 15.5 highlights the benefits Frito-Lay and its retail partners achieve (see Table 15.6 for a summary of VMI's pros and cons). Importantly, end customers, like you, also benefit from fewer stock outs and fresher chips on the shelf. Done well, VMI can be a win-win-win practice. Many other VMI models have become popular. Consider how Walmart, Bose, and Dell have operationalized VMI.

• Walmart's Retail Link Model. If you ever fly into Northwest Arkansas Regional Airport (XNA), you will immediately notice the presence of hundreds of leading consumer goods suppliers. They have opened offices to support Walmart, the world's largest retailer. If you visit P&G or Unilever, you will find scores of inventory, merchandizing, and replenishment managers.1 Their job is to use the real-time inventory and POS data they receive via Walmart's Retail Link system to decide when and how much to ship to Walmart stores across the country and around the world. Their goal: Optimize flow through (product that sells at a Walmart store) and minimize inventory. In a sense, Walmart uses Retail Link to share the information needed to outsource much of its "back office" to suppliers.

• Bose's Co-located Supplier Model. Bose Corp, the maker of high-end audio equipment, pioneered a model that relied on suppliers co-locating a representative on-site at Bose manufacturing facilities. The supplier rep analyzes inventory and places POs. By being on-site, the supplier rep can deepen the buyer/supplier relationship and participate in other activities including process and product design. Co-locating decision makers increases costs, but it can heighten integration and help partners identify new ways of working together.

• Dell's Consignment Model. Throughout the early 2000s, Dell's negative cash-to-cash cycles were the envy of the manufacturing world. What was Dell's secret? First, Dell's direct sales model meant that customers paid for their computers before they were assembled. Second, Dell required suppliers to hold inventory on consignment at a 3PL warehouse co-located by one of Dell's manufacturing facilities. When Dell received a customer order, the 3PL would deliver the parts needed to assemble the "customized" computer. At this point, Dell took ownership of the inventory. Many manufacturers call consignment programs VMI.

So far, we have discussed integrating suppliers into what many managers consider to be operational supply chain activities. Asking suppliers to proactively participate in new product development requires a leap of faith. New product development (NPD) is, after all, a strategic process that locks in as much as 80% of the final cost of the product. 2 NPD is also highly proprietary. Companies are always engaged in a race to see who will be the first to bring the next big hit product to market. Engaging suppliers early in the NPD process increases the risk that rivals will gain access to proprietary knowledge and know-how. You may be wondering, "If early supplier involvement (ESI) in NPDThe supplier is part of your NPD efforts in the very early stages, tapping into their expertise and optimizing product or service design. is risky, why do it?" That is, shouldn't you keep NPD in-house? Sadly, there is no simple answer to this question. Your decision depends on how you answer the questions listed in Table 15.7. 3 Considering these questions will help you weigh whether the benefits of ESI outweigh the risks.

Ultimately, ESI makes sense if a supplier can help you bring better products to market faster without inflating development costs. Because ESI often makes strategic sense, you need to identify when and how to include suppliers in the NPD process. Figure 15.5 breaks the NPD process into core stages and identifies how you can involve suppliers at each stage. At every stage, your supply partner's role is twofold:

1. Provide Feedback. Suppliers possess a lot of technical expertise. In fact, you buy from them because they can do something better than you can. Thus, suppliers can provide feedback to help you determine if a concept is feasible and how much it will cost to bring to market.

2. Make Suggestions. Supplier expertise and experience enables them to offer alternative ideas regarding materials and processes that lead to better products and lower production costs.

The point you need to remember is that when you obtain feedback and explore alternatives earlier (rather than later), you reduce development costs and the time it takes you to bring a new product to market. As a rule, you also end up with a better product.

Let's reiterate one critical point: The timing and level of integration depends on suppliers' ability to help you better develop a winning product. As Figure 15.6 shows, your options range from not including suppliers in the NPD process to outsourcing the entire NPD process to suppliers. Your job is to constantly be on the lookout for opportunities to appropriately integrate supplier expertise into the NPD process. At Deere & Company, supplier engineers are co-located at Deere's engineering design center to build strong relationships and make it easier to determine when and to what extent suppliers should participate in specific new product initiatives. See Table 5.8 for a brief summary of the pros and cons of ESI.

Inviting suppliers into your plant to manufacture and assemble your product is the most aggressive type of buyer/supplier integration. Volkswagen's truck assembly facility in Resende, Brazil, set the standard for supplier-integrated manufacturing. The facility was J. Ignacio Lopez' "dream factory." The goal: Create a supplier consortiumAn association of several business companies to reduce costs, improve quality, and shorten product development cycle times. Volkswagen's Resende truck plant relied almost exclusively on suppliers for the assembly of the entire vehicle. Volkswagen built the manufacturing facility and invited seven suppliers to establish assembly lines within the facility. Each supplier was responsible for managing an entire module as follows.

1. Maxion built the truck's chassis.

2. Cummins assembled the powertrain.

3. Meritor put the suspension together.

4. Delga stamped the cab panels in Sao Paulo and welded them together at the Resende facility.

5. VDO assembled the instrument panel and other interior components.

6. Remon attached the wheels and tires.

7. Carese operated the paint shop.

Each supplier provided its own specialized equipment, managed its own inventory, and hired and trained its own workers. In fact, suppliers employed approximately 80% of the operations workers. Because they all wore the same basic uniform, the only way to tell who is paying the check is to look for a small company insignia located on the worker's shirt pocket. Suppliers were paid when the finished truck rolled off the line and passed a detailed quality inspection. The cost of any defect was charged back to the responsible supplier. Although Lopez hoped that VW would export his supplier-consortium model to all of its manufacturing plants worldwide, VW ended up selling the operation to MAN SE in 2009. The supplier-consortium concept remains a dream as it has yet to be widely adopted elsewhere. In fact, because of the way VW operationalized the concept—i.e., paying while making large profits—some pundits asked the question, "Is VW's New Plant Lean, Or Just Mean?" 7