20. Sep. 2009

The total end-to-end value chain/ supply chain must be Lean

by Danie Vermeulen

True value-add is only possible if we make the entire value chain lean

A recent Lean blog post compares GM’s costly fragmented supply chain strategy with Toyota’s end-to-end Lean Supply Chain. We are reminded that true value-add is only possible if we make the entire value chain lean. Eliminating our waste at the expense of suppliers or other parts of our supply chain is superficial … that same kind of short lived efficiency that will quickly turn around a bite you where it hurts most!

Below are some excerpts and comments from Danie Vermeulen:

“By my math, GM needs to dump 4,000 dealers to get to the Honda/Toyota benchmark - not 2,600.

Give this article a read: Fixing Detroit's Broken Business Model

The author writes of GM purchasing: “Struggling to manage costs during the early-1990s recession, GM installed a new top purchasing executive; Jose Ignacio Lopez de Arriortua. He tore up existing contracts and demanded that suppliers agree to immediate price cuts of up to 20%. Many suppliers protested, but ultimately submitted to his demands. They began crafting a new aggressive standard for purchasing operations – a standard copied not only by Ford and Chrysler, but also by many other large players in the supply chain. Over the next sixteen years, Detroit and its increasingly powerful purchasing departments demanded, and got, ever greater discounts and cost-downs from their suppliers. Purchasing agents began getting bonuses for successfully negotiating lower prices. Suppliers, over time, became conditioned to believe that the "lowest price always wins."

He goes on to describe how the relentless domination of GM over their suppliers with a single-minded cost focus completely destroyed any incentive the suppliers had to innovate or improve. Continuous improvement on the part of a supplier was immediately converted to cost reduction for GM.

So a supply chain picture emerges of suppliers beaten like whipped pups over cost upstream, a bloated fixed cost pig of a dealer base downstream, and the GM accounting department ( and training ground for just about all senior management) sitting squarely in the middle. It is patently obvious that GM didn't care about the total cost, so long as it wasn't their cost.

As the dominant force in the supply chain, Toyota, with their legendary supplier partnership focus and much smaller dealer base optimized the whole of the supply chain. GM, on the other hand, saw the Lean lessons from Toyota as applicable to themselves only, and never saw the whole.

From the eyes - and wallet - of the customer, the corporate borderlines between supplier and manufacturer, and manufacturer and dealer, and dealer to customer, are distinctions without differences. The price the customer pays is largely a function of the total cost, regardless of which entity in the chain incurred the cost.”

Danie’s comment:

Big mistake number one - milk your suppliers and bleed them dry. That is just plain dumb in any language. We all know now that strategic partnership with suppliers is crucial. So much more can be gained by working with supplies and by ensuring that they will be financially secure and successful.

A worse train wreck than the cost issue is quality. In reading over the National Automobile Dealer Association report for 2007, I was surprised to learn that the average dealer loses money on a new car sale, but makes a great deal of money selling parts and service. Maybe you already knew that. I am sure that this is true for GM dealers much more than for Honda and Toyota dealers simply because the smaller dealer base in the Japanese supply chains sells so many more cars per dealer - so much less fixed cost per car sold.

By deploying such an obese dealer network, GM has put the dealers in the service business - with the unintended consequence of making defects the dealer's best friend. Couple that with a 'low cost is all that matters' mentality hammered into the suppliers and it should come as little surprise that GM has been perceived as a worse value than Toyota and Honda for as long as the Japanese have been operating in the US.

Finally, GM's loss - tragedy, in fact - is your company's gain if you can take this and look at the entire value chain in which you operate, and honestly assess how it plays out in the eyes of your final customers. Do you manage for the optimization of the whole, or are you like GM, grabbing your own and letting the rest of the players in the chain, and the final customers, fend for themselves

Danie’s comment:

Big mistake number two - sacrifice quality or worse, deliberately lower quality. Isn’t it sad how several products nowadays rely on its spare parts / consumables to drive profits? Interesting design principles. What does that say about the quality of the product?

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