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Supplier Partnership Hierarchy

Learnings from Toyota: how the best supply chain teams in the world approach supplier relationships.

Supplier Partnership Hierarchy

Everybody knows the old adage: "You are what you eat."

The same is true for supply chain. If your suppliers are unhealthy, your business is unhealthy. This is nowhere more true than in the automotive industry. In this post, we will provide an introduction to the Supplier Partnership philosophy that helped Toyota -- a company famous for its supply chain -- succeed. The hierarchy below is only one small part of the overall Toyota Production System, as studied by Professor Jeffrey Liker.

Moreover, the post explains one of the philosophies that underlies our work at LightSource: that suppliers are part of the extended enterprise, and should be partnered with and not just leveraged. Unlike a traditional eRFX or P2P system, LightSource is a collaborative workspace between Buyers and Suppliers to tackle supply chain tasks together. Unlike a standard RFP, our strategic sourcing projects are living documents that help folk collaborate and engage in Information sharing, Joint Improvement, and enourage the trusting relationships described in the Hierarchy:

Supplier Partnership Hierarchy Pyramid

Scroll below for an expanded chart including concrete details around what each level means and how practically to execute them within your supplier portfolio.

A Brief History on Automotive Supply Chain

For decades, the US Automotive companies took a fundamentally adversarial approach to their core Tier 1 suppliers. Procurement managers thought their job was to negotiate hard and leverage their suppliers until just the brink of bankruptcy -- that's how you know you're getting a good deal. The relationships were very tense and trust was low. One of the suppliers to the "Big 3" described negotiations with Ford, GM, and Chrysler as being "a reign of terror" that "gets worse every year."

And in reverse, the partnership from suppliers wasn't any better. Knowing that any little bit of information would be used against them in negotiation, suppliers would choose instead to metaphorically throw sand in the eyes of their OEM customers. Talking with industry veterans, we'd even hear stories of OEMs inviting supplier reps to the offices, splitting them into different isolated rooms, and pressuring them into austere deals by playing bids against each other. Sounds a lot like a police interrogation right?

The supplier relatonship was adversarial, true costs were muddy and unknown, and creating win-win's was impossible.

While the US Auto industry struggled under this tensely unproductive culture, across the pacific, the Japanese OEMs took a fundamentally different approach. They chose partership over enmity. In the words of a former Honda engineering leader:

"At the Japanese Auto's, Toyota and Honda, we viewed Suppliers as part of our extended enterprise."

Under this cooperative supply chain model, suppliers shared all data - about the plant, costs, and quality. This bred long term strategic relationships. The Japanese OEMs felt a responsibility that the supplier be profitable and competitive. When evaluating a new supplier, the question was less about price and instead more focused on the supplier's capabilities as a source of new technologies and innovation.

At its core, price-only negotiation is about splitting the pie, it's zero-sum. Partnership and innovation is about finding fundamental gains that can be shared. Its because of these practices that companies like Toyota were able to thrive while others struggled. They delivered superior vehicles, with superior reliability, at better prices, and made suppliers want to work with them more not less.

To read in more depth about Toyota's approach, we highly recommend the works of Professor Jeffrey Liker, specifically an article Building Deep Supplier Relationships, or for great depth his landmark book The Toyota Way.

Operationally, there are a set of clear steps you can take to create better partnership outcomes. And we'll go into a few below:

More Detailed Look: Supplier Partnership Hierarchy

Supplier Partnership Hierarchy Full Chart

If you read through the Hierarchy, Key Elements, and Practical Recommendations in detail, there are a couple themes that emerge.

At the very bottom of the pyramid is "Mutual Understanding and Trust." We've talked with numerous experts that brought TPS to companies that previously had traditional vendor management. And they all say it starts with Trust. You can't just say you want "partnership;" it actually has to be spoken through your actions. The moment times get tough, and you really need that cost reduction, and go to the supplier to pressure for a cost down without a lean improvement -- you've lost that trust forever. For that reason, in the base we also list coprosperity. The end goal is not to leave suppliers unprofitable, but indeed just the opposite. The goal instead is to collaborate and share so well, that both the buyers' and suppliers' organizations can thrive.

At the very top of the pyramid is Kaizen, the process of continuous improvement. Maintaining supplier profitability does not mean that cost is ignored. Efficiency opportunities are very heavily scrutinized by all participants by every vantage point. The Japanese automotive suppliers would work arduously to set target they felt were ambitious yet achievable, while building in a healthy supplier profit. This profit they viewed as sacrosanct -- always digging into every cost except the marketup percentage. And in the rare cases, where Toyota's target-setting was provably wrong, they would actually award suppliers cost-ups. These are the times when in the short-term Partnership can feel painful. But that alternative is siloing information and never having honest trust-based conversations around kaizen opportunities.

LightSource Users Achieve Better Outcomes through Supplier Partnership

LightSource is built on the philosophy of collaboration between buyers and suppliers. As a company, one of our core principles is enhancing transparency, but not tipping the scales.

By definition, teams that use LightSource have a portal and system of record for collaboration with their suppliers. Any person joining the team or viewing projects has a clear insight into not just "what is the cost," but also "how did we arrive at that cost," and "is it fair."

The information shared through LightSource sourcing projects (our version of eRFX), is used to build up benchmarks and cost-knowledge that can be drawn on by both buyers and suppliers. This intelligence base is helpful for discovering lean opportunities, design optimizations, and process improvement ideas. Our focus is using data to generate win-win's for all supply chain participants.

Moreover, tools like the LightSource Supplier Scorecard, provides regular and consistent feedback to supplier partners on performance, and what changes could be make to level up to a preferred supplier status -- to win more business.

And finally (we'll explore this in a future post), LightSource can be thought of as a "virtual Obeya" -- a cross-disciplinary room filled with documents and data that produce game-changing insights.

To learn more about LightSource, or just share ideas on Supply Chain philosophy, don't hesitate to reach out to us at: contact@lightsource.ai.