I am always surprised how little companies know about the further
reaches of their supply chains, and how few take real responsibility for
designing them. They seem to have evolved over time as different
purchasing directors have come and gone. This is not just about who
makes what, at what price and where. But much more significantly it is
about how all the replenishment loops upstream of the pacemaker process
for the whole value stream are coordinated across many different
suppliers. It is probably true that you get the suppliers that you deserve!
So where is the pacemaker process for your end-to-end value stream? In
car making the whole system is obviously triggered at the assembly plant.
However for many consumer goods the value stream is or should be
triggered by customers pulling products from the shelves in the retail
store. Wherever it is, in my view the lead firm has the responsibility to
determine and coordinate the way the whole value stream is configured. It
is also their responsibility to establish the framework for how all the
suppliers and sub suppliers work together to continually reduce costs over
time and across product generations.
And it is the responsibility of every firm to pull all the components they
need from their immediate suppliers, by picking them up as frequently as
possible, rather than waiting for suppliers to fill a truck and deliver to
them. This helps to compress time and improve responsiveness across the
value stream and is the most effective way of eliminating noise and
created demand amplification in the order signals passed upstream. Noise
creates the most insidious waste of all – excess stocks and excess
capacity to deal with the peaks and troughs of orders – for which
everyone denies responsibility!
I was reminded of this in reading a remarkable article in the New York
Times on 12 May 2005 (Heavy Load
by Norihiko Shirouzu and Jathon
Sapsford) describing how Toyota has designed a completely new
production system for its low cost van and pick up for developing
countries. This IMV project, as Toyota calls it, bypasses their traditional
production sources in Japan and is made up of a network of plants and
suppliers stretching from Argentina to India, Indonesia, Thailand and
South Africa. Their objective is to produce a series of rugged vehicles for
developing countries that cost 25% less than previous models. The first of
these vehicles has just gone on sale in Thailand.
In addition to normal target cost down exercises on every component,
Toyota also went to great lengths to correctly configure the entire supply
base for this family of vehicles.
“Toyota set up a war room for IMV
production at its office in Bangkok. On the wall is a long line of coded
numbers, each representing a component, from wipers to heat sensors to
nuts and bolts. Red lines fan out from each component to its
subcomponents, which in turn have more red lines going further out to
further subcomponents. In some cases, the components are traced back
to 12 levels of suppliers.” It took time to map those supply chains. But
once they did they discovered all kinds of places where subcomponents
were going back and forth between suppliers, needlessly raising costs.
This investment in designing a completely new production system is
obviously a big undertaking. However it gives them am extremely
effective base from which to triple their sales in developing countries. How
many companies going to China or India have done this level of analysis
or shown this kind of strategic thinking?
Closer to home the most significant example of a firm pulling products
from its suppliers is Tesco. Their move to factory gate pricing and
organising inbound distribution is being followed by other supermarkets.
The implications of this move will be felt across the economy as almost all
consumer goods are now being sold through supermarkets. As others
follow, Tesco are well placed to take the next step and actively reconfigure
their supply base to eliminate wasted trips and time and to encourage
their suppliers to pull products in turn from their suppliers, and so on right
back to raw materials. Have you thought of following in Toyota and
Tesco’s footsteps to pull products from your suppliers?
Yours sincerely
Professor
Daniel T Jones
