case c

CASE STUDY C On July 5, 2000, the unit general manager of Billings Equipment, Inc. instructed the Supply management team to renegotiate existing agreements for a 10 percent reduction with major suppliers because of target costs exceeding expectations. Jeff Martin, a supply management engineer, was instructed along with the entire purchasing staff to contact his suppliers immediately with what they would view as very bad news. Jeff had to face his suppliers with this demand. Company Background: In June 1998, Billings Equipment, Inc., formed a new business unit and opened a plant in Seattle to produce a new line of earthmoving machines for the construction industry. The organization had a history of impeccable ethical treatment of suppliers and was considered to be a leader in the industry. For two years, Jeff was actively involved in reducing costs and cycle times of his suppliers. Everyone involved would agree that the process was emotionally heated on occasion, with shedding of cooperative blood, sweat, and tears. Jeff’s suppliers had invested many personal hours and sizeable expense to reach this point in time. It had evolved into a strained, but working, relationship. Relationship with Suppliers: During the start-up period of the program, a very aggressive timeline and target cost drove emotions to a frenzied pace. Early supplier involvement in prototype and testing activity was cultivated to encourage active participation in the development of this new product line by all that had equity in its future. Suppliers were pushed to the limit on material and tooling leadtimes, exhausting goodwill and testing commitments. Everyone involved, including suppliers, invested personal time and effort toward meeting the market timelines. Purchase agreements were negotiated, and parts now were being received to support production ramped-up toward market introduction. The Problem: The push to production forced acceptance of early design of many components, which inhibited additional cost reduction. Customarily, 80 percent of cost reduction occurs during the design phase. Tooling was developed during early design configurations to meet the production schedule. As designs became frozen and cost information became more complete, the projected total costs were going to exceed target levels by as much as 20 percent. As the costs for the bill of materials (BOM) continued to rise above target levels, it became clear that this increase was not simply because of procedural or accounting errors, but rather represented true costs. The general manager realized that the rising cost situation was beyond recovery and

would impact the market pricing and success of the entire product line. At this time, Billings Equipment, Inc. had invested $20 million to $30 million in sunk costs for the plant and preproduction efforts. Something drastic would have to be done. The Ethical Issue: In an effort to at least “stop the bleeding,” a letter was sent to suppliers on July 5 declaring the regrettable necessity to reduce prices by 10 percent within 30 days. Buyers were to follow up immediately by contacting their top 30 suppliers. The veiled threat for noncompliance to reopen previously negotiated agreements indicated a possible cancellation of the product line altogether, or at least a consideration of other sources of supply. Jeff believed he would be violating a trusted relationship based on the heroic collaborative effort to meet demands over the past year. How could he carry this message to the suppliers? Even with some additional eroding of supplier tolerance for concessions, Jeff succeeded within the 30 days to get agreement from four of his five major suppliers, which represented 80 percent of the cost of materials he purchased. Approximately 20 percent of the suppliers complied promptly, within 30 days. Other buyers had mixed results. Everyone was uncomfortable moving the supplier relationships from a cost-based approach to a simple request for price reduction. Now the Other Shoe Drops: Shortly after the most faithful of the major suppliers reluctantly committed to cutting prices, the general manager made an announcement during a strategy meeting with buyers. “Because some suppliers complied readily with the 10 percent price reduction,” he said, “we are now going to push for an additional 5 percent.” This implied that suppliers had padded prices and further reductions could have been done all along. In effect, the suppliers who had complied with the first request were to be penalized. Jeff was now faced with an ethical situation pitting his responsibilities to the general manager against carefully developed supplier relationships. Assignment Question: 1. If you were in Jeff’s position, what would you have done to preserve relationships? Toyota, Ford, GM, Volkswagen Some differing opinions about working with Suppliers. It is interesting to see how large automobile manufacturers differ in their opinion about working with suppliers & standardization of parts. Consider the following. Working with Suppliers. Tadaaki Jagawa, a Toyota executive vice president said the number one Japanese automaker “received an invitation” from Ford to join the Ford Internet-based marketplace, tentatively called AutoXchange, where automakers & their suppliers hope to do business more efficiently & cut costs. Ford & GM are in a race to build the largest online marketplace to achieve greater

economies of scale, & both are trying to woo other automakers. The two companies have urged that creating a marketplace in which hundreds of billions of dollars in goods & service are traded would give their suppliers access to more business globally, allowing suppliers & manufacturers to slash costs. Toyota considers the internet marketplace only a means to efficiency & not an end in itself, Jagawa said. Because the procurement process involves not only the price but also the quality, lead time, & delivery of components, Jagawa said Toyota doesn’t want to put competitive components on the open market, such as GM TradeXchange; it would go against Toyota’s philosophy of treating suppliers as partners. “We help suppliers cut costs through a guarantee of a long-term contract; putting those parts on the open market pits us against suppliers in an adversary relationship.” Jagawa stressed that Toyota is in discussions with GM “with open mind.” Although it may mean Toyota would trade only raw material & commonly used parts on either GM or Ford system, Toyota is interested in making its buying more efficient, he said.

Standardizing Auto Parts Some of Toyota’s talks with GM also involve standardizing components. That would allow the two companies & GM’s other participants to share a common electronic procurement infrastructure & maximize the online network’s effectiveness. Toyota & Volkswagen are also trying to hammer out an agreement to standardize select components for vehicles sold in Europe. Jagawa said the two companies’s launched the talks last summer to identify specific parts they can standardize. He added, however, that the process has been slow because of a “wide gap” between what the two companies consider common components. “VW put on the table 20 to 30 parts as possible targets for standardization; we identified several at most,” said Jagawa. Toyota has said it was considering standardizing components & platforms with the German automaker to cut operating costs in Europe, where the Japanese company has had trouble reducing costs because of its limited sales volume. Toyota sold fewer than 600,000 vehicles in Europe last year. In Toyota’s discussion with both GM & Volkswagen, Jagawa said one problem that could potentially delay an early agreement is their difference over the definition of “competitive” components. Toyota considers a wider range of parts competitive, including steering wheels & in some cases even wire connectors, whereas GM & Volkswagen seem to believe many components can be standardized without hurting competitiveness. “They think we can

compete on things like styling & packaging of vehicles; we believe we compete component by component in creating vehicles,” said Jagawa.

Questions: 1. GM & Ford have quickly pushed the development of large internet sites to create an environment where suppliers must compete for business. Ford & GM argue that these internet sites should reduce cost because the negotiations are streamlined. How do you think the suppliers view these sites? 2. Rather than having vendors compete against one another, Toyota is interested in treating suppliers as partners. Is Toyota just being old-fashioned in its view? 3. A major reason for differences in opinions may be the differences in what Toyota considers “competitive” components. These are the components that would mostly be bought using the internet trading sites. Who is right? Are steering wheels & wire connectors competitive components? *****************************************************************