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W Professor Jeff Dyer
harton School
AGENDAAGENDA
KEY ISSUES IN CREATING VALUE IN SUPPLIER-BUYER PARTNERSHIPS
W Professor Jeff Dyer
harton School
HISTORICAL VISIONHISTORICAL VISION PARTNERSHIP VISIONPARTNERSHIP VISION
INTERNAL FOCUS
TOTAL SYSTEM ECONOMICS
30%
20%
50%
0%
20%
40%
60%
80%
100%
CUSTOMERECONOMICS
MY ECONOMICS
SUPPLIERECONOMICS
MY ECONOMICS
W Professor Jeff Dyer
harton School
CREATING VALUE BY FOCUSING CREATING VALUE BY FOCUSING ON THE SYSTEMON THE SYSTEM
VALUETO
CUSTOMERVALUE
TO CUSTOMER
VALUETO
SUPPLIER
VALUETO
SUPPLIER
TRADITIONAL RELATIONSHIP
STRATEGIC PARTNERSHIP
W Professor Jeff Dyer
harton School
KEY TO SUCCESS: KEY TO SUCCESS: EXPAND THE PIEEXPAND THE PIE
Leverage the full resources of partners to create value for the end customer
Work jointly with partners to lower total systems costs (optimize the system)
W Professor Jeff Dyer
harton School
LEVERAGING THE RESOURCES OF PARTNERSLEVERAGING THE RESOURCES OF PARTNERS
Top 35Affiliated Suppliers(5-6,000 Engineers)
ToyotaEngineering
(7,000 Engineers)
Remaining 250Tier I Suppliers(10-15,000 Engineers
Toyota can leverage its value creation resources by 5-15x by involving suppliers in the Extended Enterprise
W Professor Jeff Dyerharton School
Types of Costs that Vertical Alliances are Types of Costs that Vertical Alliances are Designed to ReduceDesigned to Reduce
Transaction costs Quality costs Product development costs Logistics costs (warehousing and
transportation) Inventory costs
W Professor Jeff Dyerharton School
Three Key Sources of Inter-firm Three Key Sources of Inter-firm Competitive AdvantageCompetitive Advantage
Dedicated Asset
Investments
Inter-firm Trust
Knowledge- Sharing Routines
W Professor Jeff Dyerharton School
“Just stay in the cab, Vern… maybe that bear’s hurt, and maybe he ain’t.”
W Professor Jeff Dyerharton School
W Professor Jeff Dyer
harton School
CREATING EFFECTIVE CREATING EFFECTIVE PARTNERSHIPSPARTNERSHIPS
Build trust Create multiple functional interfaces to
facilitate system learning Make dedicated/customized
investments
W Professor Jeff Dyer
harton School
BUILDING TRUSTBUILDING TRUST
Formal Mechanisms such as long term contracts, stock ownership, collateral bonds, are often necessary to signal a credible long term commitment to a partner.
Interorganizational Trust is often built on processes, not people. A partner is trustworthy if its interorganizational processes are understandable and predictable.
Informal Mechanisms such as reputation, personal trust, relational norms, are key to creating value over the long term. Formal mechanisms alone do not produce information sharing which is critical to partnering success.
W Professor Jeff Dyer
harton School
THE VALUE OF TRUSTTHE VALUE OF TRUST
Increases learninglearning (greater information sharing)
Increases customized investmentscustomized investments (willingness to risk tailored investments)
Increases speedspeed to quickly respond to market changes
Lowers transaction coststransaction costs
W Professor Jeff Dyer
harton School
THE COST OF MISTRUSTTHE COST OF MISTRUST
0%
10%
20%
30%
40%
50%
GM Ford Chrysler Toyota
Percent of face- to-face contact time with suppliers
Negotiating price/contract
Assigning blame for problems
47%
28%
21% 21%
W Professor Jeff Dyer
harton School
CREATING EFFECTIVE CREATING EFFECTIVE PARTNERSHIPSPARTNERSHIPS
Build trust Create multiple interfaces to facilitate
learning throughout the network Make dedicated/customized
investments
W Professor Jeff Dyer
harton School
Toyota’s Supplier - Customer InterfaceToyota’s Supplier - Customer Interface
Surface Contact vs. Multiple-Point Contact(Correct)
Customer SupplierPoint Contact(Wrong)
TopExecu-tives
R & D
Manufacturing
TopExecu-tives
Quality AssuranceQuality Control
Purchasing
R & D
Manufacturing
Quality AssuranceQuality Control
Sales
W Professor Jeff Dyer
harton School
Effective Partnerships at P&G/Wal-MartEffective Partnerships at P&G/Wal-Mart
Merchandising Sales
Forecasting Forecasting
Inventory Management Inventory Management
Warehousing Warehousing
Transportation Transportation
Systems Systems
Marketing Marketing
Accounting/Finance Accounting/Finance
W Professor Jeff Dyer
harton School
CREATING EFFECTIVE CREATING EFFECTIVE PARTNERSHIPSPARTNERSHIPS
Build trust Create multiple functional interfaces to
facilitate system learning Make dedicated/customized asset
investments
W Professor Jeff Dyerharton School
W Professor Jeff Dyer
harton School
TYPES OF DEDICATED ASSETSTYPES OF DEDICATED ASSETS
Dedicated Site InvestmentsDedicated Site Investments (locating plants in close proximity to economize on inventory, transportation, coordination costs).
Dedicated Physical/Process InvestmentsDedicated Physical/Process Investments (making relation-specific capital investments in machinery, tools, processes)
Dedicated Human InvestmentsDedicated Human Investments (dedicating personnel to develop relation-specific know-how and improve communication/ coordination)
W Professor Jeff Dyerharton School
Toyota Plant Configuration in Japan*Toyota Plant Configuration in Japan*
30 miles
6 miles
Motamachi, TC
Tahara, Nagoya
Affiliated Supplier Plants• Avg. distance of 30 miles• 43.5 weekly deliveries• 10,635 man days of face-to-face contact
• 12.5 guest engineers
* 1992 All plants are in Toyota City (TC) or Nagoya
Independent Supplier Plants• Avg. distance of 87 miles• 40.5 weekly deliveries• 3,764 mandays of face-to-
face contact
• 2.6 guest engineers
Tsutsumi, TC
3 miles
28 miles
1 mile
3 miles
Takaoka, TC
Honsha, TC
Headquarters & Technical Center
W Professor Jeff Dyerharton School
GM Plant Configuration in the United States*GM Plant Configuration in the United States*
200 miles
Lansing, MI
External Supplier Plants•Avg. distance of 427 miles•7.5 Weekly deliveries•1,107 man days of face-to-face contact
•.17 guest engineers
Flint, MI
Hamtramck, MI
Ypsilanti, MI
Internal Supplier Plants• Avg. distance of 350 miles
North Tarrytown, NY
Linden, NJ
Wilmington, DE
Lordstown, OH
Bowling Green, KY
Spring Hill, TN
Arlington, TX
Wentzville, MOKansas City, KS
Van Nuys, CA
Fremont, CA(Nummi)
650 miles
900 miles
455 miles
1400 miles
387 miles
2400 miles
51 miles55 miles
85 miles
* 1991Passenger car plants only (Mileage from 1990 Rand McNally Road Atlas)
W Professor Jeff Dyer
harton School
The Relationship Between Plant Distance The Relationship Between Plant Distance and Automaker Inventory Costsand Automaker Inventory Costs
0
0.01
0.02
0.03
0.04
0.050.06
0.07
0.08
0.09
0.1
0 100 200 300 400 500 600
To
tal
Inve
nto
ry a
s a
Pe
rce
nta
ge
of
Sa
les
Average Distance Between Supplier and Automaker Plants (In Miles)
Toyota
Nissan
GM Ford
Chrysler
W Professor Jeff Dyer
harton School
STRATEGIC SUPPLIER STRATEGIC SUPPLIER SEGMENTATIONSEGMENTATION
• Creating partnerships takes considerable time and resources on the part of both parties
• Not all purchased products offer the potential to lower systems costs, offer new technologies, or speed products to market
The optimal strategy requires different approaches with different types/ groups of suppliers/customers
W Professor Jeff Dyer
harton School
THE FUTURE….THE FUTURE….
Partnerships will become increasingly important for competitive advantage
Teams of companies will increasingly compete with other teams (extended enterprise); lean teams will win
Leveraging the full resources of the extended team will be critical
Leading companies will increasingly use partnerships--though not with all suppliers/customers