Volume 7 · Issue 3 · March 2002
Move Supplier Development from Conformance
to Lean Strategy
Collaborate to Compete by Building a Lean Supply
By Norma Simons and Michele Economou
Mention "supplier development" to top management
and quality professionals in most organizations today and
you will get a very different answer than you would have in
1994, when the second edition of ISO 9001 and the first edition
of QS-9000 were published.
The answer you will often get today relates to both changes
in the quality management system (QMS) requirements contained
in the latest editions of ISO 9001 and ISO Technical Specification
(TS) 16949 (and the IASG Sanctioned QS-9000 Interpretations)
and changes in the way organizations need to think and work
to remain competitive.
ISO 9001:2000 contains two subclauses7.4.1, Purchasing
Process, and 7.4.2, Purchasing Informationthat do make
an organization responsible for ensuring that its suppliers
are capable of meeting the organizations (and its customers)
specifications, but they do not require the organization to
develop its suppliers so products and services purchased from
those suppliers are improving. ISO 9001:2000 also requires
the organization to continually improve the effectiveness
of its QMS, so any competitive company should include supplier
efficiency and effectiveness as improvement goals.
ISO/TS 16949:2002, which was published by ISO on March 1,
goes farther than ISO 9001:2000 and specifically requires
your organization to pursue supplier development, which means
ensuring any supplier that affects your product has an effective
QMS and is improving its processes to meet your customers
While supplier development as required by these documents
will improve the operations of your suppliers and will thereby
improve your product and its ability to satisfy the customer,
what does supplier QMS development really mean and how is
your organization going to achieve it?
The fact is survival in todays economic climate requires
companies to develop a strategy to aggressively manage cost
and increase value to the customer. The fundamental concepts
of lean manufacturing that were created in the 1950s have
emerged as an important method of achieving this objective
in the first years of the 21st century, when ISO 9001:2000
is on the minds of top management and quality professionals
in many industries.
The central tenet of the lean enterprise is to reduce waste
and simultaneously increase value to the customer. Since production
of a high percentage of the value-added components in many
manufacturingand nonmanufacturing organizations
are outsourced, it is not enough to be the most efficient
firm, but the most efficient network.
Lean thinking and its implementation, however, need not be
applied only within an organization for its processes to become
less "top heavy", but throughout its supply base.
To use a well-know cliché, competition has moved away
from "company vs. company" to "supply chain
vs. supply chain".
This means that an effective lean strategy must obviously
incorporate and include the supply base. It is thus information
sharing and collaboration that are the keys to driving value
throughout the supply chain. In other words, ensuring that
your suppliers have effective QMSs is important, but true
supplier development goes beyond such baseline conformance
with the requirements in ISO 9001:2000 or TS 16949:2002. You
have to look at the whole business model in todays terms
and then pursue supplier development to fit the new world.
Present Situation: Competition Breaks Old Business Models
Market dominance and price leadership in most sectors have
been brokenno single company dominates its sector nor
determines price, whether you are talking about aerospace
and automotive or packaged consumer goods and telecommunications.
This is the result of the shrinking global village, the introduction
of innovative technologies that allow more organizations to
compete in a market segment and the enhanced ability of many
organizations to maintain consistent and quality-oriented
processes that output product that meets customer needs as
well as the market leader.
Take the automotive industry as an example. The competitive
arena in the US automotive market has changed from a focus
on the Big Three (DaimlerChrysler, Ford and General Motors)
to a focus on the Big Five (Big Three plus Honda and Toyota),
with several other original equipment manufacturers (OEMs)
also being competitive. There are now more major players and
no one playernor even one groupingdominates the
When it comes to price, the old model has also been broken.
Formerly, when there were material price increases, the increased
cost was passed up to the customer. Todays competitive
climate often leads to costs being passed down the supply
chain instead, especially since there is pressure on the OEMs
to remain competitive in a crowded field.
Likewise, the introduction of technology and methodologies
that can lead to increased productivity have prevented labor
costs from impacting on product costs, making price differentiation
within market segments less likely. But this requires the
entire chain to continually adapt and respond to ongoing changes
The Internet and other electronic forms of communication
have enabled the customer to access more information about
types of products and choices that are available. Power has
shifted to the customer, who defines what is valuable by what
is purchased. This continually forces companies to be more
concerned about and sensitive to the needs of the customer.
As the competitive environment becomes more intense, companies
are also noticing that profit margins are in decline. There
is little blind commitment by customers to a particular product
or servicea product or service must remain the most
value-added choice available or it will be passed over for
"the best deal". Companies need to be vigilant about
cost reduction and value to sustain a viable position in any
Improving Supply Chain Performance Is Critical to Success
Beyond the breaking of old business models and with it how
customers and suppliers work together, the arrival of lean
thinking and other process and productivity techniques means
that limited runs have replaced large batch runs in most cases.
With limited runs, supply chains must be better at what they
However, lean does not amount to much performance improvement
by an organization when its suppliers are or become a constraint
as the rest of the supply chain improves. The application
of lean and/or other continual improvement initiatives must
be common across the supply chain if limited runs and other
lean processes are to lead to competitiveness and profitability
in any sector.
But how do you pursue a lean strategy and get your organization
and suppliers to "think lean"? The first step is
to employ a "cost out" versus a "price down"
strategy. The relentless pressures for cost reduction have
forced companies to find innovative ways to offer high-performance
products at a low cost. This is prompting organizations to
assess the role of their suppliers and the supply chain as
a source of increased profitability and cost reduction.
However, as cost pressures are passed down the supply chain,
cost reduction and the overall enhancement of value cannot
be viewed as an isolated initiative. Price reduction is only
a tactical short-term solution, and organizations need to
understand that there is a limit to how much a supplier can
reduce its price and still remain viable.
Instead of focusing on a "price down" strategy,
organizations need to employ a "cost out" strategy.
This requires a holistic view of the supply chain whereby
an organization works with its supply base to achieve the
removal of waste through joint initiatives aimed at value
What is meant by value creation? Value is defined as performance
divided by cost, meaning that the output of your processes
is an improved product or service that does more or performs
better in meeting customer needs at the same or lower cost
compared with previous processes. But value can only be created
in the supply chain if there is a focus on systems integration,
which requires that several companies organize and operate
as one seamless entity.
Thus, to achieve value creation that will actually deliver
value to the customer requires:
- The alignment of the entire organizationnot just
your organization, but also those suppliers that are involved
in product realization to meet customer specifications
- An acknowledgment that value has to be delivered to the
customer in a way that will ensure profitability and increase
- An understanding of the relationship between the products
price and its performance
- The ability to deliver value to the customer by achieving
the total integration of the knowledge and skills of everyone
in the supply chain
- The information technology infrastructure to support
the supply chain processes.
More collaboration is required by your organization up to
the customer, down to your suppliers and across the supply
chain (yes, you need to work with the competition when you
share suppliers and together you can improve processes and
supplier sharing arrangements to reduce cost and create value
within the supply base without affecting competition). Improvements
in communication, information sharing and relationships based
on trust equate to the hallmark of a new era in competing
as a supply chain.
There are many stories of companies that mandated performance
improvements and cost reductions from their suppliers without
collaborating, and the result was a lack of value creation.
Likewise, the success stories involve companies that have
discussed with their suppliers how value creation is to be
achieved, that have passed down ideas, data and techniques
to assist these suppliers and that have shared responsibilities,
development processes and best practices that improved both
company and supplier performance.
Quality, Cost and Delivery have long been considered key
indicators of supply base performance. Another key indicator
has emerged in todays environmentConnectedness.
This is a measure of how well an organization is connected
to and integrated with its supply chain. In the future, Connectedness
will become another measure of how well the entire chain is
organized and run and it will turn supplier development into
supply chain development that will in turn improve the performance
of the organization itself.
Components of a Lean Supply Chain
Having explored the current market situation and the changes
required to make the transition to a lean supply chain so
as to help you understand what customers are demanding and
how you need to respond, we would like to examine some of
the lean supply chain components your organization will need
to consider in making the transition.
Remember, you are transitioning not just from an ISO 9001/2:1994-based
quality system to an ISO 9001:2000-based QMS, but from an
approach where the customer makes demands of its suppliers
to one where the customer works with its suppliers to create
a single, lean system. There may be many components to achieving
a lean system, but two in particular will be critical to every
1. Supplier/Buyer Relationships
The traditional relationship between a buyer and its suppliers
needs to be transformed into one that helps build closer ties
and fosters continued collaboration between both parties to
the relationship. The philosophy your organization applies
has to lead to "win-win" results for buyer and suppliers.
Any other approach, such as the traditional scenario where
negotiations are one-sided, will result in a suboptimal situation
and impact the overall effectiveness the leannessof
the value chain.
A collaborative relationship means a readiness on both sides
to discuss future plans, a willingness to understand each
others business processes, a commitment to share in
each others long-term strategies and an agreement to
share in cost savings realized by any joint activities. What
this comes down to is a culture change where top management
and anyone else in your organization who interact with suppliers
begin to treat them as partners rather than servants. It means
communication and cooperation that is two-way from product
design to delivery at the end-user.
When it comes to ISO 9001:2000 and any sector-specific requirements
based on it, the requirements give little direction on what
the organization-supplier relationship is supposed to contain
or how to make the supply chain lean.
The closest specifications in ISO 9001:2000 are Subclauses
5.5.3, Internal Communication, and 7.2.3, Customer Communication,
which provide requirements that offer limited insight regarding
how communication is to take place between a customer and
its supplier. It may be useful for an organization to consider
its suppliers as part of its internal operations when developing
processes to conform with Subclause 5.5.3, but what that will
involve is unclear.
A better source for guidance on establishing a partnership
between the buyer and its suppliers in QMS terms is ISO
9004:2000, Quality Management SystemsGuidelines for
Performance Improvements. It contains guidance on processes
that an organization should consider in terms of improving
supplier relationships and thereby supplier quality. For example,
Clause 6.6, Resource ManagementSuppliers and Partnerships,
Management should establish relationships with suppliers
and partners to provide and facilitate communication with
the aim of mutually improving the effectiveness and efficiency
of processes that create value.
Clause 6.6. goes on to list opportunities organizations can
take advantage of to create value with their suppliers and
The ultimate goal is for your organization to launch initiatives
to improve communication and interaction throughout the supply
chain. Developing and implementing a wide range of such initiatives
must be aimed at improving the responsiveness of the supply
chain. These initiatives may include:
- Eliminating waste and non-value-added processes and even
operations throughout the entire supply chain
- Identifying and simplifying key supply chain processes
to improve efficiency and overall effectiveness
- Rationalizing the entire supply base
- Reducing throughput and lead times and overcoming the
functional silos that divide and separate companies and
A critical component of creating a lean supplier network
is the implementation of an e-business strategy. Technology
should be used to enhance communication and move your organization
and its entire supplier network toward paperless transactions.
This will invariably improve efficiency in data transformation
and information flow without unnecessary costs. Electronic
commerce also has the ability to increase access to a larger
number of global suppliers that may be strategically aligned
with your organization. Collaboration is critical for Just-in-Time
(JIT) production of the right amount of product exactly when
it is needed and which can serve as a mechanism to avoid lead
Collaborative supply chain solutions function as a broker
between customer and supplier by communicating supply-and-demand
needs and issues across the supply chain via visual signals.
Collaborative commercec-commerceallows cyber communities
to share intellectual capital, integrate diverse business
processes and increase corporate innovation, market reach,
productivity and profitability. Todays technology promotes
a large volume of relationships, which traditional enterprise
resource planning systems do not. The technology must provide
a means for understanding the entire supply chain, encompassing
what the roles, policies and processes that define its personality
are and how business transactions are handled.
Its About Quality and the Bottom-Line
Unfortunately, most organizations with a registered QMS are
likely to have developed their documentation and processes
without understanding the entire value stream. Both ISO 9001:2000
and ISO/TS 16949:2002 have a stronger process focus, which
means organizations need to concentrate more on value-added
activities. Quality concepts must be taken beyond ISO 9001
or TS 16949 conformance and be integrated with lean principles,
while performance measures must be based on waste removal
and continual improvement initiatives. A lean enterprise is
highly dependent on having stable, predictable processes with
very few nonconforming products.
Many companies still do not have a means of tracking the
quality performance of their strategic suppliers (e.g., trends
in defective parts per million [PPM]). Quality has to move
beyond conformance and provide value to the customer. According
to JD Powers, the bottom-line fact is that the perceptions
of quality and reliability of more "informed" consumers
are used as "tie breakers" when they are purchasing
new vehiclesand collaboration can help US OEMs to compete
against and gain back market share from other OEMs.
In summary, your organization can begin creating a lean supply
chain with its suppliers by doing the following:
- Redefine organization/supplier relationships
- Develop and implement an effective e-business strategy
that will enhance communication across the supply chain
- Use appropriate performance measures that will provide
feedback on the supply chain
- Increase collaboration across the organization/supplier
- Employ a "cost out" strategy
- Align your entire organization with its suppliers so
that they form a single value-generating entity
- Improve process stability and process capability.
Creating and developing a lean supply chain requires the
ultimate focus on the bottom-line through total systems integration
and a commitment to provide value to the customer. A strategy
of collaboration and systems integration is the only way that
companies and their associated supply chain networks will
be able to increase their profit marginsand that applies
to both the companies and their suppliers.
We had the opportunity to attend a "Developing a Lean
Supply Chain" conference on February 20, 2002, at the
Automotive Hall of Fame in Dearborn, MI, and many of the ideas
presented above are a result of attending sessions at that
conference and having the chance to discuss these ideas with
the guest speakers. These speakers included Mike Flynn from
the University of Michigan, OSAT; Carol Ptak, President and
CEO of APICS and co-author with Eliyahu M. Goldratt of Necessary
But Not Sufficient; and Gary Flum, Director of Customer
Value at QAD, a sponsor of the conference that develops software
to assist the automotive and other industries with the conducting
of business via Internet connectivity and c-commerce.
Norma Simons is President of Simons-White &
Associates, Inc., a consulting and training organization that
specializes in providing customized business and quality management
solutions. She is presently working on a Reliability Committee
for the American Society for Quality (ASQ) and is an ASQ-Certified
Quality Engineer, Reliability Engineer and Six Sigma Black
Belt. Ms. Simons has a MS in Industrial Engineering/Operations
Research from Wayne State University in Detroit and can be
contacted by e-mail (firstname.lastname@example.org).
Michele Economou is Director of Sales & Marketing
at Simons-White & Associates, Inc. She has been heavily
involved in the quality field for the past six years, during
which time she has served as the Quality Program Manager of
the Automotive Industry Action Group (AIAG). Ms. Economou
is a voting member of the ASQ Automotive Division Council,
recently completed two terms as Editor-in-Chief of the Divisions
Automotive Excellence magazine and is a member of THE
OUTLOOKs Editorial Advisory Board. She has a BS from
Central Michigan University and an MPA from Oakland University
and can be contacted by e-mail at email@example.com.
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