ISCOM/473 Supplier Evaluation Case Review WEEK 4 TEAM A
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iscom473week4casestudychapter13.docxCase 13–2
Delphi Corporation
Paul Brent, director, lean purchasing operations at Delphi Corporation, was preparing for his meeting the following week with Dave Nelson, vice president, global supply management. Dave had recently appointed Paul to head the new supplier development initiative in the Delphi global supply management (DGSM) organization. It was
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currently Tuesday, August 18, and Paul was meeting with Dave and the other senior members of DGSM the following Monday at 9 a.m. to review key decisions concerning implementation of lean supplier development.
DELPHI CORPORATION
Delphi was a world leader in mobile electronics and transportation components and systems technology with revenues of approximately $28 billion. The company manufactured vehicle electronics, transportation components, integrated vehicle subsystems and modules in its six divisions: Delphi Electronics & Safety, Delphi Energy & Chassis, Delphi Thermal & Interior, Delphi Steering, Delphi Product and Service Solutions, and Delphi Packard Electric. Approximately 185,000 people worked for Delphi in 38 countries around the world.
The roots of Delphi Corporation go back to the early days of the North American automotive industry. Formed from the parts making operations of General Motors Corporation (GM) in 1991, Delphi was incorporated in 1998 and became independent in 1999 following its initial public stock offering (NYSE: DPH).
THE DELPHI MANUFACTURING SYSTEM
J. T. Battenberg III, former chairman and CEO of Delphi, launched the Delphi Manufacturing System (DMS) in 1996. This initiative was modeled after the principles of the Toyota Production System and represented the cornerstone of the company’s drive to become a lean enterprise. DMS focused on six interdependent elements aimed at eliminating waste: employee environment and involvement, workplace organization, quality, operational availability, material movement, and flow manufacturing. During the decade that followed the introduction of DMS, Delphi received 23 Shingo Awards for Manufacturing Excellence.
DMS was, however, focused exclusively on Delphi plants and manufacturing facilities. The company’s approach to supplier cost reductions involved the traditional industry practice of negotiating annual price reductions for purchased goods and services. Although this approach provided a steady source of cost savings that were important to the company’s overall financial well-being, it only delivered low single-digit cost reduction performance.
In 2002, facing continuing significant cost pressures from its customers, Battenberg examined opportunities to step up Delphi’s cost-reduction efforts. Recognizing that approximately 60 percent of Delphi’s costs were represented by the purchase of parts and materials, Battenberg decided to make a change. His plan was to extend DMS principles to the supply base.
Thus, Battenberg went outside the organization and hired Dave Nelson as the new vice president of global supply management. Dave was a seasoned purchasing executive, the former head of purchasing at TRW, Honda of America, and most recently John Deere. Battenberg felt that by going outside the company for this important post he would signal the dramatic change that Delphi needed to make in its supplier relationships.
DELPHI SUPPLY MANAGEMENT STRATEGY
Delphi’s purchasing organization numbered approximately 1,800 procurement staff and another 500 in supplier quality. It used approximately 30 commodity teams, across four categories—chemical, electrical, metallic, and technological—that spent roughly 80 percent of the dollars on direct materials. The organization was a centralized-hybrid structure, matrixed by divisions and regions. Divisional purchasing directors, regional purchasing directors, and commodity directors reported to Dave Nelson and to the divisional and regional presidents. The commodity team leaders were divisional buyers, and typically included cross-functional representation, depending on the need, from areas such as quality, manufacturing, and product engineering. Staff was largely located in the business units, with 50 people at the head office.
The Delphi goals for supply were to take a total cost focus, adopt strategic sourcing, extend lean principles to suppliers, and establish deep supplier relationships. To accomplish these goals, Dave Nelson wanted to shift from a price to a cost focus and launch lean into the supply base. He proposed creating teams to focus on three key areas: strategic sourcing (including global sourcing) for direct and indirect purchases, cost management, and lean supply development. He commented on the challenge:
With a total spend of approximately $14 billion in direct purchases and $3 billion in indirect purchases, our global supply management team should play a major role in achieving the objective of significantly reducing costs within Delphi manufacturing and our supply base. We need to help our suppliers better understand the significant cost pressures facing Delphi because of customer demands for annual price reductions. So we need to work much more closely with our suppliers to get and keep costs out—not merely push them onto someone else.
I identified nine key elements of the Delphi’s lean supply transformation (see Exhibit 1). All nine elements need to be integrated to provide the maximum benefits.
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EXHIBIT 1 Delphi Lean Supply Management Strategies: Nine Elements Working in an Integrated Way
EXHIBIT 2 Delphi Strategic Sourcing Framework
STRATEGIC SOURCING
When Dave Nelson arrived at Delphi, the company had a global supply base of nearly 7,000 suppliers. Believing that working with substantially fewer suppliers would make Delphi more agile and reduce costs, Dave Nelson was vehement in his vision to right-size the supply base (see Exhibit 2 for the Delphi strategic sourcing framework):
Our vision is that components with high value and complexity are core and ultimately will be sourced to a group of strategic suppliers with whom we will have close and deep relationships. Lower-value materials that still have high complexity will be sourced to near-core suppliers. Niche suppliers would be those with unique products or with patents that restrict Delphi’s ability to compete. Commodities with low value and less complexity will be sourced using a more conventional approach.
COST MANAGEMENT
Effective cost management required the ability to develop and manage cost standards that determined what a part or
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service should cost, based on real details. Dave Nelson described how cost management worked at Delphi:
By truly knowing what a part or service should cost, the design and sourcing dynamics change from an auction mentality, based on aggressive competitive bidding, to a joint waste-elimination focus. This leads to better designs, better processes, and the highest level of true competitiveness. It also requires mutual trust, utmost integrity, and confidentiality because all elements of cost are being studied—the books are open and the discussions are detailed.
Merely asking for cost reductions does not help suppliers become more competitive. Supply management needs cost management tools and models that allow for informed purchasing decisions. Cost management is needed for effective supplier development in order to understand what, where, and when to make improvements and process changes.
LEAN SUPPLIER DEVELOPMENT
During his 30-year career at the company, Paul Brent had worked in various assignments in engineering, production operations, quality, and as a plant manager. For the previous five years, Paul had been the director of lean operations for two of Delphi’s largest divisions, reporting to the head of manufacturing operations and to his divisional president. In this position he had been responsible for implementing DMS initiatives at each division’s plants.
Paul was attracted by the opportunity to “start with a clean slate” when approached by Dave Nelson to take on the newly created role. Dave’s objective was to establish a supplier development group that would complement the other key initiatives in DGSM—strategic sourcing and cost management. Dave Nelson described his vision for supplier development:
Supplier development requires the expertise of engineers dedicated to enabling suppliers to achieve the best levels of lean manufacturing in their plant operations. I want to put together a group of Delphi supplier development engineers who will work directly with suppliers, in their plants, on initiatives designed to eliminate waste in areas such as process improvements, operational productivity and efficiencies, product quality, and delivery.
My experience has been that the magnitude of cost savings opportunities can be dramatic with suppliers who are involved—when they experience the exact same double-digit improvements as Delphi’s manufacturing operations achieve through DMS. Reduction in people costs range from 20 to nearly 50 percent, increases in productivity range from 30 to 60 percent, and first-time quality can improve in a range of 10 to 45 percent. The payback can be significant. The investment in resources to implement supplier development generally yields a 3-to-1 return on investment.
THE LEAN SUPPLIER DEVELOPMENT PLAN
In preparing for his meeting with Dave Nelson and other senior members of the DGSM organization, Paul wanted to identify key issues related to lean supplier development implementation in four general areas: structure and organization, processes, credibility with suppliers, and resources and budget. His objective was to gain consensus from the DGSM leadership team in these areas in order to form the basis for his implementation strategy. As a starting point, however, Paul wanted to consider the alternatives available and make initial recommendations to the group.
Organizational issues were related to differences among the five Delphi divisions and to the global nature of the company’s supply base. While Paul was in favor of a common supplier development process, he recognized that his organization would have to accommodate differences across divisions with respect to technology, processes, product life cycle, and customer base. Divisional and regional presidents would need to understand the implications of lean supplier development for their organization and suppliers.
While the majority of Delphi’s suppliers were based in North America, its percentage of purchases from outside North American was increasing, particularly from Asia. This trend had been a result of Delphi’s global expansion, the addition of new suppliers from low-cost regions, and global expansion of existing Delphi suppliers. Consequently, the structure of the new supplier development organization would have to take into account the global reach of Delphi’s operations. How quickly should he expand supplier development to international suppliers? Should he create supplier development offices in key regions around the world?
In addition, there was also the matter of where Paul would get his supplier development engineers. Delphi had developed a significant depth of lean manufacturing knowledge through DMS implementation at its plants. Paul also had a strong network in the company that he could tap. However, Paul wanted to set some guidelines concerning what percentage of his group would be recruited internally and what target percentage would come from outside the company.
A second and related issue was the need to establish a lean supplier development process. Paul wanted to
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identify the steps that would be used to implement lean supplier development, starting with supplier selection and ending with implementation of a plan agreed to with the supplier. However, Paul had a number of questions concerning how this process would work. For example, how would suppliers be selected to participate? Would they be nominated by someone in DGSM, by someone outside the DGSM group, such as a plant, or could suppliers volunteer to participate? Criteria needed to be established regarding when a supplier represented a good opportunity for development. In addition, what steps would be followed concerning meetings, assessment, and implementation—who would be involved from Delphi and the supplier and when?
Paul was especially concerned with how suppliers would receive Delphi’s supplier development initiative. He commented on the history:
After years of being pounded on with the heavy-handed approach, they may not muster the faith, will, or commitment to shift to this new lean paradigm—even when it means larger profits, higher quality, and enhanced competitiveness for them. They may not trust Delphi because of bad experiences in the past with customers who promise trust but fail to deliver on commitments and responsibilities. We must change this viewpoint held by some suppliers.
How would benefits be shared between Delphi and its suppliers? Dave Nelson had indicated to Paul in their first meeting, “Conceptually, Delphi’s value proposition is to share gains on a 50/50 basis with suppliers, but each situation should evaluated individually.” Paul wanted to establish specific ground rules concerning how savings would be shared.
A final issue was related to the budget and resources. Dave Nelson had already indicated to Paul that he expected the supplier development group would grow to 50 engineers. Paul estimated that each person would cost approximately $100,000 per year in salary and benefits, plus related expenses such as travel. How fast Paul grew the number of supplier development engineers would be influenced by a number of factors, such as supplier acceptance and payback from the initiative.
Paul also recognized that a primary measure of the performance of his new group would be cost reductions. Consequently, he would not only have to set targets on headcount, but also savings. However, identifying savings was not always a simple task. For example, how long would cost reductions be counted? Would it accumulate over the life of the contract, the life of the component, or for the current fiscal year only? Would cost avoidance and cost reductions both be measured, or would only year-over-year piece price reductions be measured?
As Paul sat down at his desk to prepare for his meeting the following Monday, he began to appreciate the complexity of the challenge that lay ahead. While lean supplier development represented a significant opportunity for Delphi, implementation would need to be carefully planned and executed to avoid potential problems with the company’s divisions and their key suppliers.
